Which Bankruptcy Might Be Right for Your Situation?

Individuals and businesses are struggling during these uncertain times of a global pandemic and economic crisis resulting from COVID-19. If you find yourself with mounting debt and no foreseeable way to pay it back, one option may be bankruptcy.

We understand the decision to file bankruptcy is a difficult one. Our experienced lawyers are available to help determine your eligibility for bankruptcy and which Chapter would most benefit you.

Chapter 7 Bankruptcy

You are probably most familiar with a Chapter 7 Bankruptcy. Most debtors file Chapter 7 Bankruptcy and do not lose any property, but they get rid of thousands of dollars in unsecured debts. Most Chapter 7 bankruptcies are “no asset” cases where the debtor keeps all their property. A Chapter 7 Bankruptcy case stops creditor harassment and debt collection.

These cases are sometimes referred to as a liquidation bankruptcy and they are the most common and basic form of bankruptcy in the United States.

To qualify for a Chapter 7 Bankruptcy case, you must meet income requirements determined through a means test. The Means Test is designed to compare a debtor’s income to the average income of households in your area. If your average income is below the average income of a household of your size, you can qualify to file under Chapter 7. If your income exceeds the median income level, do not despair as there is a second section of the test that might help you qualify to file under Chapter 7.

If you do qualify, after you file your bankruptcy petition, a trustee is appointed to manage the liquidation and distribution of any non-exempt assets to creditors. If the trustee identified non-exempt assets, the trustee liquidates the individual’s property and then distributes it to creditors. Individuals can keep “exempt property.” Once a Chapter 7 Bankruptcy is completed and approved, the individual’s unsecured debt is wiped out.

Most Chapter 7 Bankruptcy cases are completed within four to six months after the date you file your bankruptcy petition.

Chapter 11 Bankruptcy

Chapter 11 Bankruptcy is a reorganization, mainly utilized by large businesses. In contrast to Chapter 7, the debtor remains in control of business operations under chapter 11 and does not sell off all its assets. Chapter 11 cases allow a business to come out of bankruptcy as a healthy business. Businesses will attempt to change the terms on debts, like interest rates and values of payments as a mechanism to restructure their debt in a way that will ensure their survival.

Chapter 11, Subchapter 5 Bankruptcy

In 2019, the Small Business Reorganization Act of 2019 (“SBRA”) added a new subchapter to Chapter 11 of the Bankruptcy Code, which became effective on February 19, 2020.

The SBRA is aimed at simplifying the Chapter 11 Bankruptcy process for small businesses by increasing efficiency, lowering costs, and easing the plan confirmation process, making a bankruptcy more attractive and beneficial to small businesses by removing some of the main hindrances that previously prevented the small business from reorganizing under Chapter 11.

The SBRA is tailored for the small business debtor–a person or entity engaged in commercial or business activity with aggregate non-contingent liquidated secured and unsecured debts of $2,725,625.00 or less, excluding debt owed to affiliates or insiders.

Under a Subchapter 5 Bankruptcy, a small business can reorganize its debt, but in a simplified, more efficient and less costly manner than was previously available.

Prior to filing, you will work with the bankruptcy team to prepare your plan for reorganization and once the bankruptcy is filed, the plan (similar to the plan required in an individual’s Chapter 13 Bankruptcy) must be submitted for approval with 90 days of filing. To file under a Subchapter 5 Bankruptcy, a small business provides the business’ most recent balance sheet, statement of operations, cash flow statement, and a federal income tax return (or a sworn statement that such a document does not exist). 

In reorganizing under subchapter 5, the small business debtor must commit all of its “projected disposable income” or property of equivalent value to make payments under the plan for a minimum of three and a maximum of five years (the “Income Commitment Period”) and must demonstrate a “reasonable likelihood” that it will be able to make all payments under the plan. The plan must also provide “appropriate remedies, which may include the liquidation of nonexempt assets” to protect creditors if the debtor fails to make plan payments. “Disposable income” means income received by the debtor that is not reasonably necessary to (1) maintain and support the debtor or a dependent, (2) satisfy domestic support obligations that become first payable post-petition, or (3) ensure the continuation, preservation, or operation of the business.

Chapter 13 Bankruptcy

Chapter 13 bankruptcies are available to individuals but are far more complex than Chapter 7 bankruptcies. If you do not qualify for a Chapter 7 Bankruptcy, you will have to file under Chapter 13.

In a Chapter 13 Bankruptcy, an individual that has regular income can develop a plan to pay back parts, or all, of their debts over a period of up to 60 months. One advantage of a Chapter 13 Bankruptcy is it allows individuals to avoid foreclosure on their houses, in contrast to what may happen with a Chapter 7 Bankruptcy. A trustee is appointed and helps oversee the administration of the plan to pay at least a portion of the amount you owe to unsecured creditors to the trustee who distributes it to the creditors. If you successfully complete the plan, the remaining debts to those creditors are erased.

It takes three to five years to complete a Chapter 13 plan.

Debts Not Discharged by Bankruptcy

It is important to note that not all debts can be discharged through bankruptcy. Some examples of debts that cannot be discharged include:

• Federal student loans (typically)
• Alimony and child support
• Debts that arise after bankruptcy is filed
• Some debts incurred in the six months prior to filing bankruptcy
• Taxes
• Loans obtained fraudulently
• Debts from personal injury while driving intoxicated

Debtors must pay these debts in any of the types of bankruptcies filed.

We are in uncertain, and challenging times. Call us to discuss if bankruptcy may help you come out of these uncharted waters financially healthy and headed in the right direction.

The Geller Law Group practices Bankruptcy Law and is considered a debt relief agency by federal law. We help individuals and businesses file for bankruptcy relief under the Bankruptcy Code. The Geller Law Group can assist individuals located in Maryland, DC, and Northern Virginia, including bankruptcy matters in Alexandria, Fairfax County, Arlington County, Prince William County, and Loudoun County.