Bankruptcy provides a financial “fresh start” for individuals and businesses that are overwhelmed by debt or need refuge from their creditors while reorganizing operations. Individuals are able, after liquidation or reorganization, to “discharge” many kinds of debt so that they can move forward and seek to reestablish financial stability. Secured claims are not dischargeable, and some other kinds of debts are also automatically excluded from discharge or may be excluded by order of the bankruptcy court. Businesses, while not entitled to a discharge, may seek to wind down through liquidation or continue operations through reorganization. Creditors will often find that an individual or business’s bankruptcy is an opportunity to ensure payment or partial payment of existing claims while minimizing the expense and hassle of debt collection.
Debtors can lose their entitlement to a discharge by acting in bad faith, concealing assets, fraudulently transferring assets prior to bankruptcy, failing to keep financial records, or failing to cooperate with their trustee, among other reasons. It is important for debtors to consult with experienced bankruptcy counsel prior to filing a bankruptcy petition to ensure that the case goes smoothly, all appropriate disclosures are made, exemptions are maximized, all non-exempt assets are turned over, and no transfers or actions will prevent the debtor from getting his or her discharge. It is advisable for creditors to consult with experienced bankruptcy counsel when they receive notice of a debtor’s bankruptcy to ensure that their claim is timely filed, any special priorities or rights to which they are entitled are protected, and they do not run afoul of the federal injunctions that automatically arise when a bankruptcy is filed.
The attorneys of Marshack Hays LLP have a combined bankruptcy practice of more than 75 years, representing Chapter 7 and Chapter 11 Trustees, lenders and institutional creditors, individual creditors, and individual and corporate debtors in Chapters 7, 11, and 13.
There are several types, typically called “Chapters,” of bankruptcy. Which Chapter a debtor chooses will be dictated by his or her circumstances, and will significantly affect what rights a creditor has. What follows is a brief overview of the available Chapters. Bankruptcy is complex and holds pitfalls for the unwary: any decision you make about a bankruptcy – yours or someone else’s – should be made in consultation with an experienced bankruptcy attorney.
- Chapter 7 Bankruptcy
In a Chapter 7 bankruptcy – also referred to as “liquidation” – a trustee is appointed to marshal and liquidate available assets to pay a debtor’s creditors. Chapter 7 is available to individuals and businesses, and there are no applicable debt limits. However, most debtors must be able to pass the “means test” to be eligible for Chapter 7 bankruptcy: this is a formula which takes into account a debtor’s income to determine whether that debtor may file under Chapter 7 or is required to file under some other Chapter. See our “Bankruptcy Liquidation” page for more information.
- Chapter 13 Bankruptcy
Chapter 13 bankruptcy is a reorganizational proceeding rather than a liquidation. It offers individuals or sole proprietorships the ability to propose a plan to repay all or a portion of their debts over three to five years. The Chapter 13 trustee, appointed by the Office of the United States Trustee, a division of the Department of Justice, helps Chapter 13 debtors to organize their assets, communicate with creditors, and make payments. Debtors with a higher income – who are therefore not eligible for Chapter 7 – may choose Chapter 13 reorganization instead. Chapter 13 offers the additional benefit of allowing a debtor to retain their house and even modify certain kinds of secured claims. Debt limitations apply, and debtors with income too high for Chapter 7 and debts too substantial for Chapter 13 are restricted to filing under Chapter 11. See our “Bankruptcy Reorganization” page for more information.
- Chapter 11 Bankruptcy
Chapter 11 bankruptcy, also called “reorganization,” is available for individuals and businesses who want to continue operations and retain assets rather than surrender assets for liquidation. As in Chapter 13, in Chapter 11 the debtor proposes a “plan of reorganization” that sets forth the means and procedure for payment of creditor claims. Creditors vote on the plan, which is subject to rigorous requirements set forth in the United States Bankruptcy Code, and the plan is subject to bankruptcy court approval and oversight. Ideally, a trustee is not appointed and the individual or business retains all assets and serves as the “debtor in possession.” In some cases, committees of creditors are organized to assist in the case, and those committees can wield significant power in negotiation and confirmation of a Chapter 11 plan. Chapter 11 reorganization plans involve restructuring, and range from relatively simple to incredibly complex. See our “Bankruptcy Reorganization” page for more information.
Should I Declare Bankruptcy?
Bankruptcy is a complex legal process that almost always requires the assistance of an experienced attorney. Whether you are considering liquidation or reorganization, there are aspects of bankruptcy that may not be immediately evident and can substantially affect the outcome of the case. Your attorney can help you spot those issues. You will also want to consider the collateral effects of a bankruptcy: how long will it take your credit to recover? will the bankruptcy impact your business relationships? will it affect your spouse or your dependents? Bankruptcy is not a decision to be taken lightly or with imperfect understanding, and it is not a cure-all: but in the right circumstances it can provide the “fresh start” to honest but unfortunate debtors for whom the system was designed. If you have more questions, or would like to discuss your options, please contact us. We can help.