Here are some things to think about before you decide to file for Chapter 7 or Chapter 13 bankruptcy.

Should You Choose Chapter 7 or Chapter 13 Bankruptcy?

Chapter 7 bankruptcy works well for people who can protect all of their property with exemptions, whose income is low enough to meet qualification requirements, and whose debt is the type that bankruptcy will discharge.

By contrast, Chapter 13 bankruptcy works best for people:

• whose income is too high to qualify for Chapter 7 bankruptcy
• who would like to save a house from foreclosure or a car from repossession, or
• who want to pay back nondischargeable debt, such as back child support or income tax debt, through a three- to five-year repayment plan.

Will Bankruptcy Wipe Out Your Debt?

Before you file your case, you’ll want to think about the goals because a bankruptcy discharge doesn’t eliminate certain types of debt (called priority obligations). For instance, you can wipe out most credit card obligations, medical bills, and personal loans. But you can’t discharge domestic support obligations (such as child and spousal support), newer tax debt, student loans (unless you can prove undue hardship), and more.

Is Your Lender About to Foreclose on or Repossess Your Property?

If you have debts secured by your property (such as a mortgage or car loan), your lender can foreclose on the home or repossess the car if you default on your obligation (or take any other property that serves as collateral for the debt). Your lender has this right because of the lien you agreed to when you took out the loan.

However, bankruptcy’s automatic stay can stop or delay the foreclosure and repossession process. The relief afforded by the stay in Chapter 7 bankruptcy is usually temporary. But filing for Chapter 13 bankruptcy might allow you to:

• keep the property and catch up on your missed payments
• reduce the balance of your loan if you qualify for a cramdown, and
• eliminate wholly unsecured junior liens from your house through a process called lien stripping.

Source: https://www.nolo.com/legal-encyclopedia/considering-bankruptcy.html

Committing fraud before or during bankruptcy can result in serious consequences, including a denial of discharge, a fine, or even a criminal conviction. Read on to learn more.

Filing for bankruptcy is a great way to get a fresh start. But you must play by the rules. Any dishonest dealings before or during the bankruptcy process could rise to the level of bankruptcy fraud, so avoid needless trouble by following these tips:

• accept that you might not be able to keep all of your property
• don’t use bankruptcy to wipe out shady business dealings
• complete your bankruptcy paperwork truthfully, and
• learn the consequences of civil and criminal bankruptcy fraud.

Exchanging Property With Creditors for Debt Relief in Bankruptcy

While the powerful relief afforded by bankruptcy frees you from overwhelming debt, it comes at a cost to your creditors. Bankruptcy law attempts to mitigate this loss by giving your creditors a share of your nonessential assets in exchange for wiping out your debt. You’ll disclose all property you currently own (and asset transfers) and keep the things you can exempt—generally property needed to maintain a job and home.

Fraud That Starts Before Bankruptcy

Fraud doesn’t always play out within the bankruptcy itself—it can occur before the bankruptcy filing. Here are some examples: 

• obtaining credit under false pretenses, such as misrepresenting income or assets on a credit or loan application
• falsifying financial documents used to support a credit request (misrepresenting the debtor’s worth)
• purchasing items on existing credit with no intention of repaying the debt (proven by showing the lack of an ability to pay at the time of purchase)
• charging expensive luxury items or taking out substantial cash advances shortly before filing for bankruptcy (often called “presumptive fraud”)
• knowingly writing a bad check, or
• engaging in deceptive business practices.

Fraud Committed During Bankruptcy

Example of fraud committed during bankruptcy include:

• failing to list an asset on the appropriate bankruptcy schedule to prevent it from being sold for the benefit of creditors
• concealing a property transfer that occurred before the bankruptcy (for example, failing to disclose gifting a car to a friend)
• providing a false document to the bankruptcy court or trustee
• destroying or withholding documents
• knowingly making a false statement in the bankruptcy paperwork or to the bankruptcy trustee at the 341 meeting of creditors, or
• paying someone to help hide property from the court.

Criminal Bankruptcy Fraud

A significant scheme to deprive multiple creditors would be more likely to rise to the level of criminal bankruptcy fraud. Under federal law, cases of criminal fraud are investigated by the Federal Bureau of Investigation (F.B.I.) and aggressively prosecuted by the U.S. Department of Justice (D.O.J.). Although the bulk of the crimes apply to debtor activities (the person who files the case), creditors, bankruptcy trustees, court personnel, and third parties can also be convicted of bankruptcy crimes.

Also, many types of dishonesty are often involved in criminal bankruptcy fraud, some of which are also crimes. You’ll find most bankruptcy crimes in federal criminal statutes. (18 U.S.C. §§ 152, 157.) Here are some examples.

Concealing Assets

• failing to disclose a property transfer that took place before filing the case
• failing to disclose assets in the bankruptcy paperwork, and
• enlisting someone’s help to hide property.

Concealing and Falsifying Information

• filing a false or incomplete bankruptcy form, and
• destroying or hiding records.

Identity Issues and Unauthorized Filings

• filing a bankruptcy case using false identity information
• filing multiple bankruptcies in different jurisdictions, with or with property identification, and
• filing a bankruptcy case on another’s behalf without authorization.

Bribery and Embezzlement

• bribing a trustee or court official, and
• embezzling funds from a bankruptcy estate.

Although bankruptcy can offer a fresh start and an opportunity to reorganize your finances, there are also drawbacks. For example, credit may be very difficult to obtain. Read on to learn more.

What Happens When Declaring Bankruptcy?

Bankruptcy can reduce the debt total you have to pay or in some cases have debt eliminated. An “Automatic stay” is put in place that forbids collectors from attempting to obtain repayment in any manner. This gives you the time to organize your finances with the bankruptcy court and your creditors.

Chapter 7

In this form of bankruptcy, it is probable you will have to liquidize some assets to pay a portion of what is owed. Some states have laws saying certain assets, such as a car, house or retirement account are not eligible for liquidation.

Chapter 13

This is a reorganization of existing debt so they can be paid off either in full or partially during a three to five year window. But if you do not maintain payment, creditors may try to liquidate your assets.

What Happens to My Credit if I Declare Bankruptcy?

Undoubtedly, your credit will be damaged by filing for bankruptcy. With Chapter 7 bankruptcy it may remain on your credit file for ten years. Chapter 13 is slightly more preferable from a credit standpoint as at least you will be paying some of your debt, however it will still stay on your credit report for up to seven years. Once your bankruptcy is complete and you no longer owe any debts, obtaining credit will be difficult. Certain lenders do work with people who have faced bankruptcy but usually at less favorable rates. 

Are Bankruptcy Filings Publicly Available?

Bankruptcies are considered a public record and copies can be obtained through the court system software known as PACER.

Will Bankruptcy Affect My Job or Future Employment?

Some employers, especially those in Government or financial sectors do run credit checks and it is conceivable your career may be negatively impacted by a poor credit report following bankruptcy. However, it will not show up when an employer does a regular criminal background search prior to your employment.

Source: https://www.experian.com/blogs/ask-experian/what-happens-when-you-file-bankruptcy/

You won’t necessarily lose your home in Chapter 7 bankruptcy—especially if you don’t have much home equity and your mortgage is current. Whether you can keep your home after filing for Chapter 7 bankruptcy will depend on the following factors:

• whether your mortgage is current
• if you’ll be able to continue making the payments after bankruptcy
• how much equity you can protect with a homestead exemption, and
• the amount of equity in your home.

If you’re behind on your payment, in foreclosure, or have more equity than you can protect, you’ll have a better chance of keeping your home in Chapter 13 bankruptcy. Filers faced with those circumstances should learn more about choosing between Chapter 7 or Chapter 13 when keeping a home.

Your Home and the Chapter 7 Bankruptcy Trustee

Chapters 7 and 13 work very differently, so it’s important to understand what to expect—especially if you want to keep valuable property in Chapter 7. Here’s how it works.

After filing for Chapter 7, your property will go into a bankruptcy estate held by the Chapter 7 bankruptcy trustee appointed to your case. However, you don’t lose everything because you can remove (exempt) property reasonably necessary to maintain a home and employment. The trustee will sell any remaining assets and distribute the sales proceeds to your creditors.

Here’s the tricky part—if you make a mistake, it’s unlikely that the bankruptcy judge will allow you to dismiss the case, and you could lose the house. So you must follow the rules carefully.

Are Your House Payments Current?

You’ll likely lose your home if you’re behind on the mortgage payment when you file for Chapter 7. Although the automatic stay will temporarily stop a foreclosure, the best thing you can hope for is delaying the process for a few months.

• Why filing won’t cure a default. Chapter 7 bankruptcy doesn’t provide a way for you to catch up on the overdue payments. This presents a problem because a mortgage is a secured debt, and you can’t wipe out the lien in Chapter 7 bankruptcy. The lender can foreclose after the automatic stay lifts, and you’ll lose the house.
• What will happen if you file. The lender will either ask the court to lift the automatic stay to allow foreclosure proceedings to continue (which the court will likely grant if the trustee doesn’t plan to sell the home) or wait until the bankruptcy ends, proceed with foreclosure, and then sell the house at auction.
• Chapter 13 bankruptcy can help. If you’re behind and want to keep your home, the better option is to file a Chapter 13 case. Unlike a Chapter 7 bankruptcy, it has a provision that allows you to catch up on mortgage arrearages over the course of a three- to five-year repayment plan. Also, if you have more equity than you can protect with a homestead exemption (more below), you can pay your creditors the value of the nonexempt equity in the plan, as well.

Can You Continue Making House Payments After Chapter 7 Bankruptcy?

It’s also important to be sure you can afford to continue paying the mortgage payment after a Chapter 7 bankruptcy. Losing the house after your case might put you in a worse financial position. Why? If the lender couldn’t sell the home for the amount you owe, you’d be stuck with a deficiency balance depending on the laws of the state you live in.

How Much Equity Is in Your Home?

If your mortgage payment is up-to-date, your next step will be determining how much equity exists. You’ll start by valuing your home. Then you’ll subtract any outstanding mortgage balance from the home value. The equity would be the amount you’d have in your pocket if you were to sell the house.

If you don’t have any equity, you’re in good shape—trustees don’t sell houses without equity. Otherwise, you’ll need to be able to protect your equity with a bankruptcy exemption to avoid losing the home in Chapter 7 bankruptcy.

Can You Protect Your Home Equity With Bankruptcy Exemptions?

State exemption statutes list the property its residents can protect in bankruptcy. Some states allow residents to choose between either the state exemption list or the federal bankruptcy exemption scheme. Either way, almost all states allow residents to protect some home equity with a homestead exemption. You might be able to exempt even more with a wildcard exemption.

If your exemptions adequately cover your equity, the trustee won’t sell your home in a Chapter 7 bankruptcy. However, if your exemptions protect only a portion of it, the trustee will sell the house, pay off the mortgage, give you the amount you’re entitled to exempt, and use the remainder of the sales proceeds to pay creditors.

Keep in mind that the trustee will take into account the costs to sell the home. If, after deducting sales costs, the amount remaining isn’t enough to make a meaningful payment to creditors, the trustee will abandon the property (and you’ll get to keep it).

Learn more about your home in Chapter 7 bankruptcy.

Source: https://www.nolo.com/legal-encyclopedia/lose-home-file-chapter-7-bankruptcy.html

One aspect of the CARES Act that has not received as much press is Subchapter 5 of the Bankruptcy Code and the CARES Act changes to that section of the bankruptcy code. Subchapter 5 was originally created under the Small Business Reorganization Act of 2019 (“SBRA”) on February 19, 2020. Read on to learn more.

Because the size limit for SBRA Subchapter 5 was approximately $2.7 million of non-contingent, secured and unsecured debt the number of businesses that qualify for Subchapter 5 bankruptcy protection was minimal but the CARES Act increased the debt limit to $7.5 million.

What types of entities qualify for Subchapter 5?

Maximum Debt Level: The total of non-contingent, secured and unsecured debt may not exceed $7.5 million. This is increased from the previous cap of $2,725,625.

Limits on Types of Businesses: Entities that derive substantially all of their income from the operations of a single real property are not eligible for Subchapter 5.

Here is a quick summary of Subchapter 5:

• The debtor must file its plan of reorganization within 90 days of filing its bankruptcy petition. However, the bankruptcy court is able to extend the deadline if certain conditions are met. The Covid-19 impact on the economy is expected to provide courts with justification for extensions.
• The debtor is able to spread its debt over 3 to 5 years and must devote disposable income to paying creditors.
• Administrative expenses may be paid over the life of the plan, rather than at plan confirmation.
• Debts are discharged when the debtor completes its plan payments.
• A creditor committee is not established unless for cause.

A trustee is automatically appointed; however, the debtor retains the control of its assets and operations. The trustee’s primary objective is to facilitate a consensual plan of reorganization. This means the trustee acts more as a mediator between parties, and does not undertake an immediate investigation of the debtor’s financial affairs. Equity holders of the debtor are not required to provide new value if they want to retain their equity interest in the business.

Source: https://www.focusmg.com/post/the-cares-act-and-subchapter-5-of-the-bankruptcy-code

Depending on the circumstances, small businesses have three potential bankruptcy options. Read on to learn more.

Chapter 7 – Chapter 7 is a bankruptcy option for debtors that do not have the means to restructure their obligations and continue in business. In Chapter 7, a trustee is appointed, available assets are sold, and creditors are paid to the extent funds are available. Partnerships, limited liability companies, and corporations are all eligible to file bankruptcy under Chapter 7. Depending on their income, individuals who own and operate small businesses as sole proprietorships also may file bankruptcy under Chapter 7. To learn more, see the articles in Chapter 7 for Small Business Owners.

Chapter 13 – Chapter 13 can be a restructuring option for small businesses owned and operated by individuals (a sole proprietorship). Only individuals can file Chapter 13, so it is not an option for businesses operated through partnerships, limited liability companies, or corporations. Chapter 13 eligibility is also subject to debt limits. As of April 2019, an individual owing more than $419,275 for unsecured debt and $1,257,850 for secured debt can’t file Chapter 13. (The limits for cases filed before April 1, 2019, are $394,725 in unsecured debt and $1,184,200 in secured debt.) To learn more, see the articles in Chapter 13 for Small Business Owners.

Chapter 11 – Another option for a small business is Chapter 11 bankruptcy. Generally, small businesses shy away from Chapter 11, because it is expensive, risky, time-consuming, and complex. Chapter 11 is the only bankruptcy option, however, for a small business seeking to restructure and continue in operation if it is owned by a partnership, limited liability company, or corporation. Chapter 11 is also the only bankruptcy option for individual business debtors who want to reorganize but owe too much money to meet Chapter 13’s eligibility requirements.

Chapter 11, Subdivision V – Most small businesses in need of reorganization help turn to this modified Chapter 11 specially designed for small business filers. It’s a simplified reorganization that doesn’t involve a creditors’ committee and disclosure statements and the bankruptcy judge can confirm a plan without creditor consensus. Small businesses with debt of $2,725,625 or less are eligible. In response to the coronavirus pandemic, the debt limit is currently $7,500,000 until March 26, 2021.

Learn about all of the options available to small businesses and their owners by reading Chapter 7 vs. Chapter 11 Bankruptcy.

What Is Chapter 11 Bankruptcy?

Chapter 11 is part of the United States Bankruptcy Code. Chapter 11 generally gets in the news when major corporations — like General Motors, K-Mart, and United Airlines — have financial problems and turn to the bankruptcy courts for help. Most Chapter 11 cases, however, are filed by businesses and companies that are far from being household names.

Under Chapter 11, a debtor can restructure its finances through a plan of reorganization approved by the bankruptcy court. By reducing obligations and modifying payment terms, a Chapter 11 plan can help a debtor balance its income and expenses, regain profitability, and continue in operation. Under Chapter 11, a debtor also can sell some or all of its assets so it can downsize its business if necessary or pay down claims that it owes.

Special Provisions for Small Business Debtors in Chapter 11, Subdivision V Cases

For the most part, small businesses and major corporations have to follow the same rules and meet the same requirements to reorganize under Chapter 11. There are, however, some special provisions for small business debtors that can help them fast track through the Chapter 11 process and reduce legal and other restructuring expenses.

Under the Bankruptcy Code, a Chapter 11, Subdivision V proceeding filed by a “small business debtor” is considered to be a “small business case.” A “small business debtor” is a person or entity who: (1) is engaged in business or other commercial activities; and (2) owes no more than $2,725,625 as of April 1, 2019, in total claims, excluding obligations owed to insiders such as family members of the business owners. (In response to the coronavirus pandemic, the debt limit has been increased to $7,500,000 until March 26, 2021.)

Source: https://www.nolo.com/legal-encyclopedia/chapter-11-bankruptcy-small-business-owners.html

Tenant bankruptcy can put a restriction on what you can do in collecting unpaid rent. As a landlord, however, you are still entitled to work within the system to recover the money owed by your tenant. Read on to learn more.

Eviction for Unpaid Rent

Usually, you can give your tenant a three-day pay or vacate notice if he is behind on rent. However, if the tenant has filed for bankruptcy, you cannot proceed. This is known as an automatic stay. You can evict for other reasons, such as for violating the lease agreement or illegal behavior.

Restrictions on Landlords

If you don’t follow the orders of the bankruptcy court and attempt to collect rent from your tenant, you could face penalties but you can file your own petition with the court. A bankruptcy judge will evaluate your petition and rule on whether to allow it or not.

Judgment of Possession

The exception to the automatic stay is if you were already far enough along in the eviction process that the judge awarded you a judgment of possession. If the tenant filed before you received the judgment, you must petition the court for relief from the automatic stay. The relief from the automatic stay doesn’t mean you can collect rent — it just gives you permission to proceed with eviction.

Proof of Claim

To get in line with the tenant’s other creditors and hopefully collect some of the back rent, file a proof of claim with the bankruptcy court. Keep records of the rent due after the bankruptcy filing because the court treats them separately. Inform the court of the tenant’s security deposit as well. 

Source: https://homeguides.sfgate.com/tenant-filing-bankruptcy-owes-back-rent-53174.html

Subchapter 5 was added to Chapter 11 of the U.S. Bankruptcy Code in 2019 to make reorganization bankruptcies more accessible to small businesses. It gives small businesses that are earning a profit, but having trouble paying their obligations, a simplified process for paying down their debt. Businesses that file under Subchapter 5 can force creditors to accept court-approved repayment plans of three to five years. They can also use the plan to shed some of their unsecured debt. Read on to learn more.

Business Bankruptcy Types

• Chapter 7: This is a “liquidation” bankruptcy for businesses that are no longer viable. You will be required to sell all of your business assets to pay creditors and close the business. In return, you will be debt free.
• Chapter 11: This is a “reorganization” bankruptcy where you can force creditors to negotiate payment plans while the business stays open. This lets you repay most of your secured debts while continuing to run the business. Some of your unsecured debt may be discharged.

Both types of bankruptcy offer an automatic stay to protect you from creditors. This is often the biggest benefit of filing for bankruptcy. The automatic stay keeps creditors from collecting and will stop most court actions against you.

Benefits of Subchapter 5 Bankruptcy

Filing a small business bankruptcy under Subchapter 5 offers you the following benefits:

• Continued business operations: You will continue to own and run your business so long as you stick to the payment plan. You will also need to pay your unsecured creditors all of your disposable income while the plan is in place.
• No creditor approval: The bankruptcy court can confirm your reorganization plan without the approval of your creditors if it finds it to be fair. A traditional Chapter 11 plan must be approved by creditors.
• Only your business can file a plan: In other Chapter 11 cases, your creditors can submit a plan on your behalf. But in Subchapter 5 only your business can submit one.
• No disclosure needed: In Chapter 11 cases, you must normally file a detailed disclosure statement with the court. The statement provides a breakdown of your business and if you can repay your creditors. In a Subchapter 5 case, no statement needs to be filed.
• Special trustee: You will continue operating your business in bankruptcy, but a trustee will be named to monitor its operations. The trustee will also make recommendations to the court regarding confirmation of the reorganization plan.
• Expenses paid in installments: In a traditional Chapter 11 case, you must pay all of the administrative expenses on the day the plan becomes effective. Subchapter 5 allows you to pay the expenses over the length of the plan.

Who Can Claim Subchapter 5 Bankruptcy?

Businesses that qualify for Subchapter 5 bankruptcy must be pursuing business activities and have debt that does not exceed $2.75 million. The debt cannot include those owed to company insiders. Also, at least 50% of the business debt must come from business activities. 

COVID-19 Bill Temporarily Expanded Eligibility

The Coronavirus Aid, Relief, and Economic Security (CARES) Act enacted in March 2020 expanded Subchapter 5 eligibility to businesses with debts of up to $7.5 million for one year. The change was made to help with the expected increase in business bankruptcies as a result of the pandemic.

Creditors Still Enjoy Some Protections

Subchapter 5 made it easier for small businesses to file for a reorganization bankruptcy, but creditors still have the following Chapter 11 benefits:

• The reorganization must offer creditors at least what they would have received had you filed under Chapter 7.
• Secured creditors may still retain their rights to the property you put up as collateral.
• Secured creditors can protect their collateral and seek relief from the automatic stay.

A Bankruptcy Attorney Can Help

Subchapter 5 simplified Chapter 11 filing for small businesses, but it is still a complex process. A skilled attorney can walk you through each step in filing for bankruptcy to ensure the best possible result. Working with an experienced bankruptcy attorney near you can offer you guidance and work to protect your assets.

When you guarantee a loan for your business, friend, or family member, you make yourself liable for it. Read on to learn more.

What Is a Personal Guarantee?

A personal guarantee is an agreement that allows a lender to go after your personal assets if your company, relative, or friend defaults on a loan. 

Why You Might Sign a Personal Guarantee

Most new companies don’t have much in the way of assets. To increase the odds of getting paid, a lender will require a personal guarantee before extending a property loan or another obligation.

How to Eliminate a Personal Guarantee With Bankruptcy

It’s relatively common for a business owner to file individual bankruptcy to get rid of a personal guarantee—and most personal guarantees will qualify for discharge. Also, keep in mind that filing on behalf of the business won’t get rid of your personal obligation to pay back the guaranteed loan

Liens Remain in Bankruptcy—Usually

Some personal guarantees include a security interest in your personal assets. In that case, the lender will typically have a lien on your property. 

Personal Guarantees in Bankruptcy Chapters 7 and 13

Each bankruptcy case is different. It’s common to have a lot of moving parts and considerations, so it’s best to meet with a bankruptcy attorney. 

Chapter 7 Bankruptcy

If you don’t have much in the way of income or property—primarily debt—Chapter 7 will likely be your best option. You can wipe out (discharge) qualifying debt, such as credit card debt and personal guarantees, in approximately four months. Chapter 7 also works well if you have a substantial income, and the majority of your debt is business debt. 

Chapter 13 Bankruptcy

Many business people find this chapter helpful in several situations. You, as an individual, not the business, would be filing Chapter 13—companies can’t file. Unlike Chapter 7, you can keep all of your property, and in most cases, you’ll pay a smaller portion of your personal debt over time. Chapter 13 has a few other benefits that aren’t available in Chapter 7. If you’re like many business people, you might have fallen behind on a house or car payment while trying to keep the company afloat. You can catch up on these payments through the Chapter 13 repayment plan and keep the home, car, or other secured property. Also, you might be able to reduce the amount you’d have to pay on some collateral through a cramdown in Chapter 13 bankruptcy. 

Source: https://www.alllaw.com/articles/nolo/bankruptcy/personal-guarantee-bankruptcy.html