September 30, 2020
Since the beginning of the pandemic, nearly 100,000 businesses have permanently closed. As such, more and more businesses and individuals are turning to bankruptcy as a way of dealing with the pressure put upon them by creditors.
Individual Bankruptcy is going to be either a Chapter 7 or a Chapter 13 Petition, while Business Bankruptcy is going to be either a Chapter 7, a Chapter 11 or a Chapter 13 Petition. Therefore, an analysis of the difference between Chapter 7 versus Chapter 13 is in order which a footnote regarding Champter 11 as 11 and 13 are very similar. Not only should the debtor examine the difference between the two petitions, he should also keep an eye on the Pros and Cons of both Chapter 7 as opposed to Chapter 13 and compare and contrast each against the other.
The main difference is that the Chapter 7 Petition is more geared for debtors who do not have any or very little secured assets.
Chapter 13 is more for debtors who have secured assets that they want to protect. A secured asset is an asset such as a home or car. The Chapter 13 allows the debtor to make up his back payments while keeping up with the current ones. Upon completion of the Chapter 13 process, the debtor is caught up with their back payments and is current. Also, using Chapter 13, the debtor can in addition wipe out some consumer unsecured assets such as credit cards, etc.
In order to give the reader some additional guidance, the following is a short but simple breakdown of the Pros and Cons of both Chapter 7 and Chapter 13 Petitions:
CHAPTER 7: LIQUIDATION
1. The ability to keep all or most of your property. In a Chapter 7, the debtor can through either the Federal or State exemptions protect all or nearly all of their assets.
2. Cost of a Chapter 7: Much less expensive than Chapter 13 which has a great many more fees due to the fact that it lasts so much longer.
3. Protects the Chapter 7 Petitioner from Deficiency debt. The Petitioner is protected from balances owed from the liquidation of their assets. For example, if a home was sold for 90% of what is owed on it, the debtor will still owe the remaining 10%. However, under the Chapter 7 Petition, the debtor is protected and will not have to make up any deficiency incurred upon the sale of the home. The Petitioner will walk away from the sale owing a zero balance.
4. The Quickness of a Chapter 7 as opposed to a Chapter 13. Well, simply put, a chapter 7 is much quicker than a Chapter 13 which can last anywhere from 3 to 5 years. The average length of a Chapter 7 is around 4 to 6 months.
1. Some Debts are not dischargeable. Alimony, Judgments, child support and most governmental debt will not be discharged.
2. Length of time a Chapter 7 will stay on your Credit Report. The record of your Chapter 7 will stay on your credit report for up to 10 years.
3. In Chapter 7, you can lose your property if you cannot protect it with Exemptions. Chapter 7 exemptions, either Federal or State, allow the debtor to protect property. If the debtor property fails to fall within the protection of the exemptions, then it will be liquidated.
4. Repossession of Secured Assets. Chapter 7 does not allow the debtor much time to catch up on arrears payments on their secured assets. This is in contrast to Chapter 13, which allows the debtor to catch up on back payments for a time period of 3 to 6 years.
5. There are income requirements that must be followed or else you cannot file a Chapter 7. Chapter 7 requires passing the Means Test requirements. If the Petitioner does not pass them, then they cannot File Chapter 7. Overall, Income can disqualify a Petitioner from filing Chapter 7 and therefore many end up filing a Chapter 13.
CHAPTER 13: BUSINESS REORGANIZATION
1. The Chapter 13 Petition can save a debtor’s home or other secured assets. The main reason for filing a Chapter 13 is to protect secured assets. Thus, most of these Petitions will show various secured assets listed for protection. The most common of these are the debtor’s home or car.
2. The Debtor can get help with getting current with their back Domestic Support Payments. Chapter 13, through its ability to extend the matter from 3 to 5 years, extends to the debtor the ability to spread out back payments. Common examples that qualify are Child Support and Alimony. Also, back tax debts can be spread out in the repayment plan.
3. Removes Unsecured Debt from the Debtor. The Debtor is relieved of unsecured debt. The exact amount that the debtor pays on these unsecured assets is dictated by the income available in the Chapter 13 repayment plan. Usually, if the debtor pays anything, it is pennies on the dollar.
4. Getting out from under Second Mortgages. Under the right conditions, the debtor can get out from under a second mortgage. The key issue here is if the home is worth less than the first mortgage. If so, then the second mortgage is considered an unsecured asset debt and is eliminated under the rules of the repayment plan.
1. The length of time. As stated earlier, a Chapter 7 will last usually between 4 and 6 months. In contrast to this is the Chapter 13 which will last anywhere between 3 to 5 years.
2. The cost of a Chapter 13. A Chapter 7 Petition is much cheaper than a Chapter 13. The Chapter 13 costs more because it is spread out for so long a time, usually 3 to 5 years.
3. How much does the record of a Chapter 13 damage the debtor’s credit score? The record of the Chapter 13 will reduce the debtor’s credit score at least several hundred points.
Chapter 11: BUSINESS REORGANIZATION
Chapter 11 may be a better choice for businesses that may have a realistic chance to turn things around. Chapter 11 business bankruptcy is usually used for partnerships and corporations. It is also used by sole proprietorships whose income levels are too high to qualify for Chapter 13 bankruptcy.
Chapter 11 is a plan where a company reorganizes and continues in business under a court-appointed trustee. The company files a detailed plan of reorganization outlining how it will deal with its creditors. The company can terminate contracts and leases, recover assets, and repay a portion of its debts while discharging others to return to profitability. It presents the plan to its creditors will vote on the plan. If the court finds the plan is fair and equitable, it will approve the plan.
Reorganization plans provide for payments to creditors over some time. Chapter 11 bankruptcies are exceedingly complex and not all succeed. It usually takes over a year to confirm a plan.
Small Business Reorganization Act of 2019
In August 2019, the Small Business Reorganization Act of 2019 was passed by the U.S. Congress and signed into law by the President. It enacted a new subchapter V of Chapter 11. The act went into effect as of Feb. 20, 2020. This subchapter of Chapter 11 seems to favor the side of the applicant for business bankruptcy. It only applies if the applicant wants it to apply.
For example, subchapter V does not require that a committee of creditors is appointed or that creditors have to approve a court plan.
Sole proprietorships or incorporated entities should consult with a good business bankruptcy attorney before deciding on which type of bankruptcy to file or whether there’s a need to file bankruptcy at all. There may be other options that can be explored.
Bankruptcy is not for everybody. And there are some alternatives that the debtor can consider to resolve their financial difficulties. Sometimes it gets harder to decide which one will be right for you between bankruptcy chapter 7, chapter 11 and chapter 13. Renegotiation and or debt consolidation are just a couple of alternatives and more are out there. If however you must go the bankruptcy route, do it with knowledge and careful thought.
Need help getting your finances in order before going to a bankruptcy attorney? We can help. Contact Louis Mamo & Company today for a free consultation.
(Sources: Fox News, The Balances and SiteProNews)