Bankruptcy: A legal proceeding involving a person or business that is unable to repay outstanding debts. The bankruptcy process begins with a petition filed by the debtor or on behalf of creditors.
Bankruptcy is a legal process that provides protection to debtors from creditor lawsuits and collection activities and a means to discharge certain debts from further obligations. There is a certain process that every debtor goes through depending on the type of bankruptcy that is filed.
For consumers, small businesses, partnerships, LLCs and corporations, there is Chapter 7, Chapter 13 and Chapter 11. Which type of bankruptcy you or your business files under is determined by your individual or business entity status, income, nature of your property and debts and whether you want to repay your creditors or not.
Chapter 7 Bankruptcy Process
A Chapter 7 is a debt liquidation plan. Our attorneys begin by determining whether you qualify or not since your income meets a means test, which is based on your household size and median income for your jurisdiction. In California, it is $75,111 for a family of four. If your income is more than that, you can still qualify by calculating income and expenses to see what disposable income you may have.
If you do qualify, then you must complete a brief credit counseling class within 180 days of your filing. When filing the petition, our attorneys will carefully review your finances, assets, nature of your debts recent transfers of property or assets and other matters. With our assistance, we will help you prepare for filing the petition by completing the necessary schedules of assets and liabilities, monthly expenses, monthly income and other disclosures.
Our attorneys will help you to choose which exemptions to use so that your assets can be safe from seizure. California uses the state exemptions but has two sets, mainly depending on how much homestead equity you have, if any. Once you do file, an automatic stay goes into effect so that all creditor contacts and collection activities must cease.
During the bankruptcy, you have to complete a debtor education course before a discharge will be granted. The only appearance you generally have to make is the 341(a) hearing, where the trustee asks you under oath mostly perfunctory questions regarding your schedules. Any troubling questions may concern preferential transfers or if certain assets were being hidden to defraud creditors. Creditors may appear and ask you about the status of property secured with them. Otherwise, the meeting will only last a few minutes. Generally, no other appearances or actions are taken. You can expect a discharge of your debts about 4 months after your initial filing.
Chapter 13 Bankruptcy
Chapter 13 is a wage earner and repayment plan. It is used by individuals or small business owners who do not qualify for Chapter 7, who may have valuable assets that are not exempt or who wish to save their homes from foreclosure. You must have a steady source of income to be eligible. The difference between this and Chapter 7 is that you repay your creditors over a 3 or 5-year plan with a single monthly payment to the trustee, though most unsecured creditors are not paid 100% of their claim. The repayments are scheduled over either 3 or 5-years depending on the amount of your monthly disposable income.
Home foreclosures can be paused so long as the debtor has enough disposable income to pay the current mortgage and the monthly payments to the trustee, which includes the arrearages. Second mortgages can be stripped or reduced to unsecured status in many cases and eventually discharged.
Similar to those who file under Chapter 7, all Chapter 13 debtors have to take a pre-bankruptcy debt counseling course and a debt education class after filing and before discharge.
Debtors still choose which set of state exemptions to use along with filing the same schedules as in a Chapter 7. So long as the debtor makes the monthly payments, the bankruptcy will proceed until the end of the 3 or 5-year period at which time a discharge will be granted. Ay unpaid unsecured debt will be discharged.
Chapter 11 Bankruptcy
Corporations and partnerships may file under Chapter 11 if they wish to continue operating their businesses while being relieved from creditor lawsuits and collection activities. Individuals and small businesses can also file under this chapter but are entitled to a more streamlined process. Chapter 11 is a debt reorganization process that allows businesses to renegotiate contracts, downside operations if needed, lay off workers, find new sources of revenue and attempt other business strategies. The filing fee for this chapter is $1000 along with a $39 administrative fee.
Before filing, individual debtors do have to complete a credit counseling class and submit a certificate of completion. In most cases, debtors have to file the requisite schedules of assets and liabilities, income and expenses, financial affairs and of executory contracts and unexpired leases.
The business debtor, or debtor-in-possession, submits a disclosure statement and repayment plan for approval by a committee of unsecured creditors, though there may be more than one such committee. If not approved, the committees may submit their own plans. In some cases, a plan may be “crammed down” the creditors.
Chapter 11 can be a highly complex bankruptcy process even with individual debtors. If large corporations and businesses file, it can take years to administer and involve numerous attorneys and professionals from different disciplines and strict reporting and filing requirements.
If you are experiencing financial difficulties personally or in your business, contact the bankruptcy attorneys at the Bankruptcy Attorney Group. Their highly experienced and knowledgeable attorneys can help you decide if bankruptcy is the right course of action for you and how to proceed.