Between July 1, 2019 and June 30, 2020, over half a million people filed for different types of bankruptcy according to United States Courts. This number breaks down to 426,876 filings for Chapter 7, 232,228 filings for Chapter 13, and 777 filings for Chapter 11. Filing for bankruptcy is a tough decision, but it results in thousands of Americans being debt-free every year. If you’re considering bankruptcy, O’Bryan Law Offices wants to help. Call us today at 502-400-4020 for a free consultation.
What Is Bankruptcy?
Bankruptcy is a legal process where people or businesses that are unable to repay their creditors seek relief from their debts. The person or business looking to pay off debt can file a petition with the bankruptcy court to begin the process.
What Are the Different Types of Bankruptcy?
There are many different types of bankruptcy available depending on who files the petition. Generally, the most common difference between the types of bankruptcy is people vs. businesses or personal vs. corporate bankruptcy.
If a person or a married couple files for bankruptcy, it’s considered personal bankruptcy. Chapter 7 and Chapter 13 are the most common types of personal bankruptcy. Occasionally, personal bankruptcy is under Chapter 11, but this is uncommon.
Meanwhile, business bankruptcy is just like it sounds: when a business files for bankruptcy. Recent examples of businesses that filed for bankruptcy include Forever 21, Sears, and California Pizza Kitchen. In fact, businesses filed 90% of all Chapter 11 bankruptcies filed between July 1, 2019 and June 30, 2020.
Chapter 7 Bankruptcy
As mentioned previously, Chapter 7 is one of the most common types of personal bankruptcy that can provide people with a fresh start from debt. To be eligible, you have to prove to bankruptcy court that your income isn’t enough to pay even a small portion of your debt through a means test.
How Does Chapter 7 Bankruptcy Work?
Chapter 7 is also called “liquidation bankruptcy” because people are required to sell assets in order to pay their creditors for a debt free life. A bankruptcy trustee is in charge of the sale, also known as liquidation. The trustee can only sell non-exempt property. However, all property is protected by an exemption under state law in most Chapter 7 cases. Additionally, most Chapter 7 cases last no more than four to six months if there is no non-exempt property. In this case, the court that gets rid of your dischargeable debt is typically given three to four months after the filing date. Once that happens, you can start rebuilding your credit.
Chapter 13 Bankruptcy
Chapter 13 is the second most common type of personal bankruptcy. Unlike Chapter 7, people can keep their assets while paying off debt. Chapter 13 involves a repayment plan that only pays part of the person’s debt. In order to file for this type of bankruptcy, a person’s secured and unsecured debt can’t exceed a certain amount.
Chapter 13 bankruptcy is for people only, not businesses. However, there’s a loophole for small businesses owned by a sole proprietor. This loophole only works because a sole proprietor isn’t a separate legal entity like LLCs and corporations. One of the most significant distinctions is that a sole proprietor is personally liable for both consumer and company debts.
Benefits of Chapter 13 Bankruptcy for a Sole Proprietor of a Small Business
Keeping business assets: the biggest benefit of Chapter 13 is that you can keep all your assets while following a payment plan. But this comes at a cost. For exempt business property, the “tools of trade” exemption only protects business-related items up to a certain dollar value. This means that small business owners can choose which items to keep, but the items have to be business necessities. For nonexempt business property, business owners must include the value of nonexempt assets in their debt payment plan.
Wiping out your business assets: as a sole proprietor, your business debts and personal debts are in the same boat. This means that small business owners must include everything they owe in Chapter 13. As a result, they will later receive a discharge of any outstanding debt once the payment plan is complete. The creditor can’t collect money from the sole proprietor or the business once the discharge is released.
Paying off creditors: sole proprietors can pay off priority debts, such as taxes, in their repayment plan.
Reducing secured loans: through Chapter 13, a sole proprietor may be able to reduce secured debt balances to the property value. By doing this, a small business will be under less of a burden because the owner will be consolidating loans into their repayment plan.
How Does Chapter 13 Bankruptcy Work?
Firstly in a Chapter 13 repayment plan, a person creates a budget based on their monthly income and living expenses. Secondly, the person tells the bankruptcy court how much they can afford to pay on their debts every month. Lastly, the court and the bankruptcy trustee reviews the repayment plan. Once approved, the bankrupt person pays their disposable income to the trustee and sends in a tax return every year. Once all the payments are complete (usually within three to five years), the person’s debt disappears.
Chapter 11 Bankruptcy
Chapter 11 bankruptcy is more common for businesses than individuals. This is because the court filing fee is more than $1,700 and bankruptcy attorney fees can start around $15,000. While it’s an option for individuals, it’s usually only used by wealthy individuals. Chapter 11 can also benefit business owners who can’t file for Chapter 13 because they have too much debt. If a business does file for Chapter 11, they can use it to restructure the business and its debt. Additionally, small businesses can now file a less complicated version of Chapter 11 called Subchapter V. This option became available in February 2020.
Chapter 12 Bankruptcy
Meanwhile, Chapter 12 is a more affordable bankruptcy option for farmers and commercial fishing owners to pay off their debt without blowing all their money on Chapter 11. Chapter 12 functions similarly to Chapter 13, but with additional provisions to address the special nature of farming and fishing.
Chapter 15 Bankruptcy
Chapter 15 is a common option for people or businesses that file for bankruptcy under the laws of a foreign country, but still have assets or liabilities in the United States. The goal of Chapter 15 is to make it easier to deal with cases involving cross-border concerns. Another goal of Chapter 15 is to ensure that foreign and U.S. bankruptcy courts work together.
Chapter 9 Bankruptcy
Chapter 9 allows cities, towns, counties, taxing districts, and school districts to pay off their debts. Similarly to Chapter 13 and Chapter 11, Chapter 9 allows a filer to propose a repayment plan to pay off debt. However, Chapter 9 doesn’t cover American states or territories. So Congress passed the Puerto Rico Oversight, Management, and Economic Stability Act in 2016 to allow bankruptcy access to U.S. territories.
What Types of Bankruptcy Do I Need?
This solely depends on if you’re an individual, a spouse, a sole proprietor, a large business, a farmer or a fisherman, or a U.S. territory. If you need help paying off personal debts, Chapter 7 and Chapter 13 is the best option for you. If you’re a small business owner who needs help paying off both personal and business-related debts, definitely look into Chapter 13. If an LLC or corporation needs debt relief, Chapter 11 is most likely the best bet. If you’re a farmer or a fisherman, look into Chapter 12. Lastly, if a city, county, or school district needs debt relief, Chapter 9 is the best option. If you need help figuring out which types of bankruptcy are best for you, contact a bankruptcy attorney today.
What Are Some Alternatives to Bankruptcy?
While bankruptcy is effective in controlling uncontrollable debt, it’s a huge price to pay. Filing for different types of bankruptcy will make your credit score drop by 100 points or more. This makes it much harder to receive loans or even get a new job. If you’re looking for alternatives to control your debt, consider these:
Occasionally, you can work out an agreement with creditors to pay less than what you owe. Debt settlement will only work if you’re in default. This is because when you’re in default and file for bankruptcy, creditors may not get anything. Because of this, they may be willing to make a deal with you. It’s also important to only seek settlement for debts that you’ve stopped paying, and make minimum payments on the debts that you can afford.
To make this work, you will need a loan from a bank or a credit union that will allow you to pay off your debts on your own. Although a home equity loan or credit line, which allows you to borrow against your home, is more likely. It’s also possible to get a 0% balance transfer credit card to help consolidate your debt. With this method, you could transfer debt to that card and use the grace period to pay down principal. Lastly, you could consolidate your debts through a debt management program.
Sell Your Assets
If your income isn’t enough to pay off your debt, consider selling some of your most valuable assets. If you were to file for Chapter 7, you would have to sell your assets anyway. So skip the step that would ruin your credit score and use the money from your sold assets to pay off your debt.
If none of the previous options will work for you, consider contacting a nonprofit Kentucky credit counseling firm. Credit counselors can help you create a debt management plan with payments that you can afford with your income.
Earn Extra Income
Another debt management option is picking up a part-time or freelance job and setting aside that income for debt payments alone. A popular side job in the world of technology and social media is being an Uber, Lyft, or Doordash driver.
Restructure or Refinance Your Mortgage
A mortgage payment is a big bill. If you can negotiate paying less until you survive your debt crisis, definitely do so. All you have to do is contact your lender and ask if they’re willing to create a new payment plan. Your lender may also agree to a temporary repayment plan until you’re debt free.
Lower Unnecessary Expenses
While you’re struggling with debt, it’s important to make a budget and look at how much you’re spending on unnecessary items. You can save money by cancelling streaming subscriptions, avoiding eating out, cancelling a gym membership, or even shutting off your cable and using only Youtube for entertainment. Take all this extra money and put it towards your debt.
Contact O’Bryan Law Offices Today
We help people get a fresh start every day. If you’re looking to resolve debt by filing for different types of bankruptcy, call O’Bryan Law Offices at 502-400-4020. We will make sure you can live a life of freedom from debt. For more information, please read our legal disclaimer. You can also read our bankruptcy E-books, written by our very own Julie O’Bryan.