In Bankruptcy Information, Bankruptcy Questions

I see this question in various forms quite often. There are four main chapters (types) of bankruptcies and how and whether you qualify depends on each.

Chapter 7

This is what most people think of when they say “bankruptcy.” Chapter 7 is also called “straight bankruptcy.” Individuals who file Chapter 7 must qualify under the Means Test. That test looks at the person’s annual income as determined by his actual income from all sources for the last six months. All that income is added together to get a total. The total is divided by 6 to get an average. This is called the Current Monthly Income (CMI). The CMI is multiplied by 12 to get annual income. The annual income is compared to the median income for a family of the debtor’s size in his county. If the calculated income is below the median the debtor qualifies for Chapter 7. If it’s above, there is a presumption that the debtor should be in Chapter 13.

Chapter 11

Anyone can file Chapter 11. It’s a reorganization and can be used by individuals or huge corporations. Chrysler, Delta Airlines and others have filed Chapter 11. It’s very expensive and time consuming and not suitable for most individuals or small businesses.
In February 2020, the Small Business Reorganization Act went into effect. The purpose of this act is to make Chapter 11 available to small businesses. Many small businesses couldn’t qualify for Chapter 13 and either couldn’t or didn’t want to file Chapter 7. The Small Business Reorganization Act is sort of a hybrid between Chapter 11 and Chapter 13.

Chapter 12

Chapter 12 is only for family farmers or fishermen. If you’re neither of these, you don’t qualify for Chapter 12. Chapter 12 is very much like Chapter 13, but it recognizes that farmers and fishermen don’t have regular monthly income that is the hallmark of Chapter 13.

Chapter 13

Next to Chapter 7, Chapter 13 is the most common chapter under which individuals file bankruptcy. In Chapter 13 the debtor makes monthly payments to the Chapter 13 trustee. There are no income limitations on filing Chapter 13 like there are with Chapter 7 but there are debt limitations. For 2020 the unsecured debt limit is $394,725 and the secured debt limit is $1,184,200. If the debts exceed either of these, a person is not eligible to file Chapter 13. In addition, even if a person does qualify for Chapter 13 it’s possible the plan will not be feasible (in other words, it won’t work). This is because under Chapter 13 a debtor must repay to creditors at least what they would receive if her non-exempt assets were liquidated under Chapter 7. So, it’s possible that someone might have too much equity in her property that she can’t repay that amount within the 5 years allowed under Chapter 13.

For example, suppose a debtor has $20,000 in non-exempt equity in her assets, such as a car and house. If this debtor filed Chapter 7, her creditors would share that $20,000 as a one-time distribution from the Chapter 7 trustee. Therefore, in Chapter 13, the debtor must repay to her creditors at least $20,000 through her Chapter 13 plan. In order to repay $20,000 during the 60-month maximum that a Chapter 13 plan can run, the debtor would have to pay at least $333/month. There are other costs, such as the trustee’s fee of 10% and the attorneys’ fees, so the $333/month is an absolute minimum. If the debtor’s budget is such that she can’t afford to pay $333/month, her plan will be considered unfeasible and her case will either be dismissed or, at her option, converted to Chapter 7.

Bankruptcy Not an Option?

As you can see, it’s possible that either Chapter 7 or 13 bankruptcy isn’t an option. It’s possible to have too much money to file Chapter 7, and too much debt to file Chapter 13. Or too much money to file Chapter 7, but it’s impossible to propose a plan that is feasible under Chapter 13. In that case, Chapter 11 is available to anyone, though it might not be a palatable option. If you have bankruptcy questions or need help, contact us here, or call or text (801) 413-3708, or email steve@schamberslaw.com.

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