Explaining the differences in Pennsylvania Bankruptcy Chapters and Options for You
I recently met with a couple that had heard Chapter 13 bankruptcy is the one “that the Trustee finds out how much you make and then takes all your income.” This was, of course, wrong.
The purpose of this article is to explain the differences between the bankruptcy options. One bankruptcy remedy may work better for one person, while another person needs to file another. So here we go:
CHAPTER 13: Is very often misunderstood as the “one where I have to pay all my debts back.” This is false. Chapter 13 is used to protect property (homes, land, autos, personal injury proceeds, etc.) from foreclosure, repossession or from being sold in a Chapter 7 (more on this below). If your mortgage payments are behind; your auto payments are behind; you have a large tax debt to the IRS or State; or are being sued by your creditors; Chapter 13 is designed to protect your property from being taken from you while at the same time allowing you to restructure the debts you are required to pay. In almost every case, debts like credit cards, medical bills, signature bank loans, can be eliminated without being repaid. In Chapter 13 a “plan” is proposed stating how you intend on paying your creditors.
Chapter 13 is also there for individuals that “make too much money to qualify” for Chapter 7. In this case, the individual has to go through a process to determine how much they can really afford to pay back to their creditors. Once their “ability to pay” has been calculated, a set distribution for debts like credit cards, medical bills, signature bank loans, and other unsecured debts is incorporated into the Chapter 13 repayment “plan”.
CHAPTER 7: Is very often misunderstood as the “one where I lose all my property.” This is false. Individuals filing ANY form of bankruptcy are allowed exemptions. There are a lot of exemptions, designed to cover all types of property (Homes/Land, Autos, Bank Accounts, Retirement Accounts, etc.). Once an individual claims their property fully exempted, it is “carved out” of the Bankruptcy—meaning no one can take that property away, it is in a sense “removed” from the Bankruptcy process.
In order to qualify for Chapter 7, an individual must first pass the income testing requirements. In the Middle District of PA, about 61% of the Bankruptcy cases reported from 2017 were Chapter 7 cases. It has been my experience that, from the income perspective, most people qualify for a Chapter 7. However, an individual also wants to be able to “exempt” all their property. If an individual’s property is not fully exempt in a Chapter 7 Bankruptcy, then the Chapter 7 Trustee has the power to take the un-protected property and sell it to raise funds for the creditors.
Corporations can file Chapter 7 too. The business has to have stopped operating and retain its assets (cash, accounts receivable, equipment, etc.). The Chapter 7 Trustee will examine all the assets of the business and liquidate any assets they can to generate funds for the Creditors. A Corporation does not discharge debt in a Chapter 7, but the filing does prevent the creditors from continuing lawsuits and other collection activities against the business.
Properly filed, a Chapter 7 is a fairly quick process whereby an individual can discharge debts, keep their property and start fresh in a matter of months.
CHAPTER 11: Is primarily for corporations that need to restructure the repayment of debts in order to continue operations. The idea here is that “if the company eliminates some debts, and restructures the repayment of other debts, then after the case is over the company will be viable.” Chapter 11 is a complicated process, but simply put it is a restructuring of the way the company’s debts are repaid. Like an individual filing Chapter 13, the company in a Chapter 11 files a “plan” that states how all creditors are to be repaid. This plan is then voted on by the different groups of creditors. If a sufficient number of creditors approve the plan, then the Court will approve the plan allowing the company to move forward. If the plan is rejected by the different groups of creditors, then a new plan may be in order.
Some corporations get their plans approved and move forward, while others dismiss their case or cease operating and convert to Chapter 7 for liquidation.
CHAPTER 12: Strictly designed for farmers (crop farmers, cattle farmers, dairy farmers, fish farmers, etc.). You get the idea—farmers. It is a combination of Chapter 13 and Chapter 11 that was designed by Congress to provide an affordable bankruptcy option. This was done to lessen the amount of farms being lost. Because farmers typically have different repayment terms on a lot of their loans (being paid quarterly, yearly, instead of monthly), the Chapter 12 allows the restructuring payments to coincide with the farmer’s seasonal income. This is filed to protect the farm/equipment/animals form being foreclosed or taken by creditors. Again a repayment “plan” is filed stating how the creditors will be paid. Once the Court approves the plan, the farm operations continue to move forward under the restructured repayment terms.
Some debts are, by law, not dischargeable at all—examples are Child Support, Alimony and some Taxes. There are other debts that are not dischargeable as well, so it is wise to speak with an experienced bankruptcy attorney about your particular situation. Bankruptcy is an important financial decision that you may decide to make. So do not go it alone. Mooney Law has a dedicated, experienced, and proven bankruptcy team that can explain your options to you and help you come up with the best remedy. Call today for a FREE consultation at 833-MOONELAW. Mooney Law has 16 offices spread throughout Central Pennsylvania and Northern Maryland.