Bankruptcy is a legal process designed to help individuals and businesses eliminate or repay their debts under the protection of the federal bankruptcy court. In the United States, there are several types of bankruptcy, each referred to as a “Chapter,” which comes from their respective chapters in the U.S. Bankruptcy Code. The most commonly filed chapters are Chapter 7, Chapter 11, and Chapter 13. This blog article aims to provide an overview of these chapters, focusing on their eligibility requirements, the process of each, and how they apply, particularly in states like Florida.
Chapter 7: Liquidation Bankruptcy
Chapter 7 bankruptcy, also known as liquidation bankruptcy, is designed for debtors in financial difficulty who cannot pay their existing debts. This process involves the liquidation of the debtor’s non-exempt assets by a bankruptcy trustee, who then distributes the proceeds to creditors.
Eligibility: To qualify for Chapter 7, individuals must pass the “means test,” which compares their income to the median income for a household of your size in your state. If your income is too high, you may have to file under a different chapter.
Process: After filing for Chapter 7, an automatic stay is placed on your debts, stopping most collection actions. A trustee is appointed to take over your non-exempt property, sell it, and distribute the proceeds to your creditors.
Chapter 11: Reorganization Bankruptcy
Chapter 11 bankruptcy, often known as reorganization bankruptcy, is primarily used by businesses to restructure their debts while continuing their operations. This chapter allows the debtor to propose a plan of reorganization to keep the business alive and pay creditors over time. However, individuals, especially those with significant debts that exceed the limits of Chapter 13, can also file for Chapter 11.
Eligibility: There are no income or debt limitations for filing under bankruptcy Chapter 11, making it available to both individuals and businesses, including corporations, partnerships, and sole proprietorships.
Process: The debtor usually remains in control of their assets as a “debtor in possession” and is responsible for operating the business and filing a plan of reorganization. This plan must be voted on by creditors and confirmed by the court. The process is complex and can be lengthy and expensive, making it less common for individuals. In Florida, as in other states, businesses seeking to reorganize under Chapter 11 must navigate both federal laws and local court rules, which can vary.
Chapter 13: Wage Earner’s Plan
Chapter 13 bankruptcy is designed for individuals with regular income who wish to pay all or part of their debts in installments over some time. This chapter is often utilized by those who exceed the income limits of Chapter 7 or who seek to avoid foreclosure on their home.
Eligibility: To file for Chapter 13, your unsecured debts must be less than $419,275, and secured debts must be less than $1,257,850 (these figures are subject to change, so it’s important to check the current limits).
Process: The debtor proposes a repayment plan to make installments to creditors over three to five years. If the monthly income is less than the applicable state median, the plan will be for three years unless the court approves a longer period “for cause.” If the debtor’s monthly income is above the state median, the plan generally must be for five years. The debtor will make payments to a trustee, who then distributes funds to creditors. Filing under Chapter 13 in Florida involves complying with local court procedures and completing a financial management course.
Other Chapters: 12 and 15
While Chapters 7, 11, and 13 are the most commonly filed, other chapters exist for specific situations. Chapter 12 is for family farmers and fishermen, providing them with a reorganization plan to pay all or part of their debts. Chapter 15 applies to cross-border bankruptcy cases, where the debtor has debts or assets in more than one country.
Navigating the complexities of bankruptcy can be daunting, especially when determining which chapter is most suitable for your situation. Whether it’s liquidation under Chapter 7, reorganization under Chapter 11, or a wage earner’s plan under Chapter 13, understanding the eligibility requirements and the process of each is crucial. For individuals and businesses in Florida considering bankruptcy, it’s important to consult with a bankruptcy attorney to understand how federal laws and local rules in Florida will affect your case.
Bankruptcy is a significant step that comes with long-term financial and legal outcomes. Therefore, it’s advisable to seek professional advice to explore all available debt relief options and make informed decisions.
