“Bankrupt!” To many, the word arouses feelings of fear, desperation and loss of hope. Many individuals fear that they will never be able to own a home, purchase a car or obtain credit after bankruptcy. For that reason, many people in debt, overwhelmed by their bills and seeking relief, pay hundreds or even thousands of dollars to “debt relief” or “credit repair” agencies in the hope of avoiding what they regard as the “last straw” of filing for bankruptcy. These companies will typically settle the debt at a discount and charge a percentage of the savings for their services. The problem is that if you fall behind in making the payments you can quickly be back where you started— without any of the protections afforded by the bankruptcy laws and with no fiduciary looking out for your interests.
Bankruptcy laws are not designed to make or keep people destitute. They are intended to provide the chance for a new beginning.
At Maitlin Maitlin Goodgold Brass & Bennett (“MMGBB”) we strive to take the mystery out of the bankruptcy process and to help our clients achieve a “fresh start” by thoroughly counseling them on all available options. In many cases, we are able to negotiate a resolution that enables our client to avoid bankruptcy.
Liquidation or Reorganization?
With limited and very specialized exceptions, there are three basic types of bankruptcy protection available to individuals and businesses. Individuals may file under Chapters 7 or 13 of the U.S. Bankruptcy Code while businesses may file under Chapters 7 or 11. A brief introduction to each follows:
“Chapter 7” is intended for individuals who simply can’t pay their bills. From the moment the petition is filed, creditors must stop all collection efforts. A trustee appointed by the court gathers and sells the debtor’s nonexempt assets, if any, and uses the proceeds collected to distribute to creditors holding claims, typically for pennies on the dollar. When a debtor has no assets whatsoever, the debts are liquidated without any payment or further liability to creditors.
Bankruptcy is not intended to leave individuals destitute. Many people are surprised to learn, contrary to common public perception, that an individual can keep at least one car, home furnishings, wages, retirement funds and even a small portion of any equity in one’s home. Part of the debtor’s property may be subject to liens and mortgages that pledge the property to other creditors. While the Bankruptcy Code will allow the debtor to keep certain “exempt” property; the trustee will liquidate the debtor’s remaining assets. Accordingly, potential debtors should realize that the filing of a petition under chapter 7 may result in the permanent loss of some property.
At the end of the case, the debtor is discharged (i.e. forgiven) of any further liability. The types of debt most commonly discharged in bankruptcy are credit card bills, revolving store bills, personal loans and medical bills. The entire process is typically completed within 60 to 90 days from the date the petition is filed. With their liabilities liquidated, most people achieve a marked increase.
Chapter 7 is also available to businesses. Many small businesses fail. The purpose of Chapter 7 is to liquidate the business, dispose of its assets and discharge the debt. As a rule, it should only be considered when the owners intend to close the business for good.
A Chapter 13 bankruptcy is often referred to as a wage earner’s plan. It enables individuals with regular income to develop a plan to repay all or part of their debts. In the typical Chapter 13 chase, the debtor may own a home that has substantial equity but is unable to make timely payments because of a temporary loss of income or the burden of other debt. The goal in a Chapter 13 bankruptcy is not to liquidate but to provide way to reduce and restructure debt.
The debtor will propose a repayment plan to make installments to creditors over three to five years. Certain debts may be compromised or restructured in the process. The trustee will either confirm or reject the plan, which may also be modified as the case progresses In many cases, a mortgage may be modified to allow a longer term for repayment or to have a small portion of accumulated arrears rolled into a new monthly payment. From the time the petition is filed until the plan is conformed and implemented, the law forbids creditors from starting or continuing collection efforts.
Here’s a simple illustration to provide a basic idea of how Chapter 7 works vs. Chapter 13: In Case A, assume the debtor has a house that is worth $300,000 but owes $400,000 on the mortgage. The debtor also has $150,000 in consumer debt and another $35,000 in unpaid medical bills. The debtor is well into middle age and working for minimum wage after a loss of more lucrative employment. In this case, the Debtor might seriously consider filing under Chapter 7 to liquidate all of that debt. In Case B, assume the same debtor has a house worth $300,000 with a mortgage balance of $240,000. He or she makes $75,000 per year but also has consumer debt of $60,000 and unpaid medical bills of $25,000. In this scenario, a filing under Chapter 13 would likely make more sense because the debtor would have a chance to reduce and restructure the debt.
Of course, your situation will present its own unique set of circumstances. We are here to help you decide what is best for your family and to guide you through the process
Chapter 11 provides businesses that want to stay open with the opportunity to reorganize and to restructure debt, much as Chapter 13 does for individuals. The trustee will oversee a plan that is intended to “shed the fat” and help the company get back on its feet, avoiding collection efforts and lawsuits by creditors while positioning the company to function more efficiently.
We hear of Chapter 11 bankruptcy’s in the news frequently. Large retail chains like K-Mart and Macy’s, for example, have reorganized their businesses by seeking the protection of the bankruptcy court.
But Chapter 11 is available and useful for small businesses too. Often a single bad deal or unproductive business relationship relationship can jeopardize the viability of a small concern that is otherwise healthy. In these circumstances, it is worth considering whether restructuring under Chapter 11 may provide the best option for your business.