The Different Bankruptcy Chapters Explained
More than 52,000 personal (also referred to as consumer) bankruptcies and 400-plus commercial business bankruptcies were filed in the U.S. during the first two months of 2022. Each one fell into one of the bankruptcy chapters in the U.S. Bankruptcy Code.
When debts outpace income for an extended period a person or business can become insolvent. Bankruptcy provides an avenue out of the quagmire by reorganizing or dismissing debt.
Your financial situation typically determines what chapter of bankruptcy best meets your goals. If you are considering bankruptcy in Pennsylvania, talk with one of our accomplished attorneys at Scaringi Law to discover which chapter is best for your circumstances.
Bankruptcy Chapter 7
Individuals and businesses can file under Chapter 7 if their income is below a certain level. Chapter 7 bankruptcy, also called liquidation bankruptcy, is the most common type in the U.S. During January and February 2022, 762 Pennsylvanians filed under Chapter 7, equaling 53% of personal bankruptcies.
Basic elements in Chapter 7 bankruptcy include the following:
- Eligibility is determined through what is called a means test. Income must be below the average in order to qualify.
- Individuals can keep exempt property.
- Non-exempt property can be sold by the bankruptcy trustee and distributed to creditors.
- The trustee cannot touch your current wages, retirement accounts, or government benefits.
- The remaining eligible debt is discharged (which means erased). Eligible debt includes medical bills, credit cards, and signature loans.
- Past-due alimony, child support, and most taxes cannot be discharged. Most student loans are also not discharged. (It might be possible to discharge some tax debts such as income taxes but certain circumstances are required to get your income taxes discharged in bankruptcy. Additionally, real estate taxes may be discharged in certain circumstances.)
- A business that files under Chapter 7 is closing its doors for good. Unlike individuals, businesses cannot claim any exempt property. Everything is sold and creditors are paid in a determined order of priority.
The Keystone State does not have additional home protections above what is allowed at the federal level. You can protect up to $25,150 in home equity. Federal exemptions also protect a car with less than $4,000 in equity.
Bankruptcy Chapter 11
Large businesses that want to stay open while repaying creditors file Chapter 11 bankruptcy. Unlike Chapter 7, assets are not sold. Instead, the business and debts are reorganized. Interest rates, values of the payments, and other debt terms are renegotiated. Individuals can also use Chapter 11, but either Chapter 7 or 13 is usually more appropriate.
Basic elements in Chapter 11 bankruptcy include the following:
- There is no minimum income or maximum debt requirements.
- The business or its creditors can file a Chapter 11 bankruptcy petition.
- The debtor files an accounting of assets, liabilities, current income, expenditures, current contract, unexpired leases, and a statement of financial affairs.
- A plan to reorganize the debt is proposed.
- The creditors vote on whether to approve the plan.
- The plan can then be confirmed by the court.
Chapter 11 is the most complex of the bankruptcy chapters. The costs and legal requirements made it difficult for small businesses to file under Chapter 11. Seeing that challenge, Congress passed a new component of Chapter 11 – Subchapter V. Subchapter V simplifies the Chapter 11 process so that small businesses have an opportunity to reorganize. Before Feb. 20, 2020, small businesses had to either liquidate and close under Chapter 7 or navigate the costly and complicated Chapter 11.
Bankruptcy Chapter 12
This bankruptcy is specifically for “family farmers” and “family fishermen” who have regular income yet are under financial distress. Chapter 12 enables them to repay all or part of their debts in a payment plan. This chapter includes allowances that deal with the unique nature of fishing and farming operations. Chapter 12 is simpler than Chapter 11 and allows for more debt than Chapter 13.
Bankruptcy Chapter 13
About 46% of Pennsylvania personal bankruptcies filed so far this year were filed under Chapter 13. This chapter is often used either by those who don’t qualify for Chapter 7 or who need to protect non-exempt assets from liquidation.
Basic elements in Chapter 13 bankruptcy include the following:
- The individual has a regular income with less than $394,725 in unsecured debt and $1,184,200 in secured debt.
- A plan is developed to pay back part or all their debt in a monthly payment plan.
- The plan lasts for three to five years.
- No assets are sold. Filers get to keep everything.
- This chapter is helpful for those who have more equity in their home than is protected.
- After the payment plan has been successfully completed, any remaining eligible debt is discharged.
If the person filing for Chapter 13 is married, the income and expenses of their spouse are also given to the court. Even if they are not jointly filing for bankruptcy, the court needs this information to evaluate the household’s financial status.
Chapter 9 and Chapter 15
There are two other bankruptcy chapters that we will mention briefly. Municipalities (cities, towns, counties, school districts) can file for bankruptcy through Chapter 9 bankruptcy.
Chapter 15, added to the U.S. Bankruptcy Code in 2005, reflects the nature of a global economy. Some bankruptcy cases involve other countries. A foreign debtor with assets in more than one country would use Chapter 15.
Comprehensive Legal Guidance on U.S. Bankruptcy
Businesses and individuals fall on financially strained times for numerous reasons. A pandemic shutdown, a job loss, medical bills, and more can make it impossible to meet your monthly obligations. Don’t dig a deeper hole. Find out if bankruptcy is right for you.
At Scaringi Law, we know that people are not defined by their finances. We compassionately guide our clients through every aspect of the process. They begin to feel in control of their money, maybe for the first time.
If you wonder whether bankruptcy is right for you, call us (717) 775-7195 or reach out online. We can answer your questions in a free initial consultation.