Personal Bankruptcy

The general purpose of filing for bankruptcy is to preserve assets and eliminate debt, thereby getting a fresh start.
Chapter 7, Chapter 11, Chapter 12 and Chapter 13 are available to individuals.

The Bankruptcy Estate

Regardless of the type of bankruptcy filed, or whether the debtor is an individual or a business, the commencement of a bankruptcy case creates an “estate” consisting of property of the debtor.

Generally speaking, the estate includes all of the debtor’s legal and equitable interests as of the petition date, as well as any “proceeds, product, offspring, rents, or profits” thereof, and any property that the debtor acquires or becomes entitled to acquire within 180 days after the petition date by way of inheritance, property settlement or divorce decree, or life insurance.

In certain instances, however, property of the estate is defined more broadly. For example, in individual Chapter 11 and Chapter 13 cases, as well as non-consensual subchapter 5 small business Chapter 11 cases, the estate also includes post-petition earnings and property acquired, until the case is dismissed, converted, or closed. And, for consensual subchapter 5 small business cases, the estate likewise includes post-petition earnings and property acquired, but is limited to that which existed as of the confirmation date.

The Automatic Stay

An automatic stay comes into effect the moment a bankruptcy is filed. The automatic stay applies to both individuals and businesses alike, as well as all types of bankruptcy cases.

The automatic stay acts as a temporary restraining order, protecting the debtor, the debtor’s property, and property of the estate from creditors. More specifically, the automatic stay stops, among other things, nearly all efforts to enforce or collect a debt against the debtor, property of the debtor, or property of the estate. The purpose of the automatic stay is to provide the debtor with breathing room, and to facilitate the equitable treatment of creditors through the bankruptcy process.

The scope of the automatic stay is broad, but not without limit. It will stop, among other things, foreclosures, repossessions, wage garnishments, collection lawsuits, lien attachments and creditor harassment. But, the automatic stay will not stop, among other things, criminal proceedings, driver’s license suspension, certain commercial real property evictions, the fixing of a lien for ad valorem property taxes, payroll withholdings for retirement savings, and most family court matters including divorce, child custody and paternity. Also, in Chapter 7 and Chapter 11, the automatic stay does not stop action against non-debtor parties. But, in Chapter 13 and Chapter 12, the automatic stay does extend to qualifying co-debtors and co-signers.

Also, the stay is limited for individual repeat/serial filers. Generally, if an individual had a prior bankruptcy case dismissed within a year of filing a second case, then the automatic stay of actions against the debtor only remains in effect for 30 days, unless the debtor successfully moves for an extension thereof. And, if an individual had two prior bankruptcy cases dismissed within a year of filing a third case, then there will be no automatic stay in the third case, unless the debtor successfully moves for one.

The automatic stay remains in place with respect to property of the estate until the property is no longer property of the estate. And, as to all other actions, the automatic stay remains in place until earliest of the time the case is closed, dismissed, or a discharge is granted or denied.

Also, the automatic stay can be terminated or modified in certain circumstances, through a successful stay relief motion.

The Trustee

A trustee is automatically appointed in all Chapter 7, Chapter 12, Chapter 13 and subchapter 5 cases. For all other Chapter 11 cases that are not subchapter 5, the appointment of a trustee is not automatic, but may be requested by a party in interest and ordered by the Court under certain circumstances.

The trustee has a fiduciary responsibility to the bankruptcy estate, and is charged with, among other things, investigating the debtor’s financial affairs. Other duties and powers of the trustee differ based upon the type of bankruptcy filed. For example, in voluntary Chapter 7 cases, the trustee has control of property of the estate, and his/her major responsibility is to “collect and reduce to money the property of the estate… and to close such estate as expeditiously as is compatible with the best interest of the parties.” In Chapter 12, Chapter 13, and subchapter 5 cases, even though a trustee is automatically appointed to the case, the trustee does not take possession or control over any property of the estate. Instead, the debtor remains a “debtor in possession,” in control of their own financial affairs, and the trustee’s major responsibilities are to facilitate plan confirmation and, under certain circumstances, to act as disbursing agent for the debtor’s plan payments. For non-subchapter 5 Chapter 11 cases, the debtor likewise remains a “debtor in possession.” But, if the court ends up appointing a trustee, the debtor will no longer be a “debtor in possession,” and the trustee will acquire control of the property of the estate, and with manage those assets, operate the business, and, if appropriate, file a plan.

The Meeting of Creditors

All debtors in bankruptcy must attend a meeting of creditors. The meeting of creditors is an examination of the debtor’s financial affairs and other matters that may affect case administration. In Chapter 7, Chapter 12 and Chapter 13 cases, the trustee assigned to the case conducts the meeting of creditors. In Chapter 11 cases, a representative of the United States Trustee conducts the meeting of creditors. In all cases, creditors are invited to attend the meeting of creditors and take part in the examination of the debtor. But, oftentimes, no creditors attend.

At the meeting of creditors, the debtor will be required to provide identification, and will be required to swear or affirm that their testimony will be truthful.

Eligibility

Chapter 7 is available to both individuals and businesses. For individuals though, there are limitations on Chapter 7 eligibility based upon income. If, a person’s income is such that their Chapter 7 filing constitutes an abuse, then the bankruptcy court may dismiss or convert the case to a repayment plan under Chapter 13 or Chapter 11 of the Bankruptcy Code.

To determine an individual’s eligibility for Chapter 7, they must first pass a threshold test in which one’s current monthly income, as defined by the Bankruptcy Code, is compared to the average median income of a household of the same size, residng in the same state. If below-median, then the individual is automatically eligible to file for Chapter 7 bankruptcy. If above-median, however, the individual most complete the means test in order to determine eligibility.

The means test consists of an intricate formula of income minus expenses. If, after completing this formula, a person has too much monthly net disposable income left over, abuse is presumed; and, unless the person can rebut this presumption, they will be ineligible to file for Chapter 7. Notably though, some individuals are not subject to the Chapter 7 means test (e.g. individuals with primarily non-consumer debts, certain disabled veterans).

Chapter 13 is only available to individuals (including sole proprietors), and does not have any income based eligibility limitations. Rather, all individuals are generally eligible for Chapter 13 provided they earn regular income and have debts that do not exceed the debt limits set by the bankruptcy law. Specifically, to qualify as a Chapter 13 debtor, one must have less than $419,275.00 in unsecured debts and $1,257,850.00 in secured debts.

Chapter 12 is available to both individuals and businesses engaged in a farming or commercial fishing operation. To be eligible, the debtor must have regular annual income, as well as debts that do not exceed the debt limits set by the bankruptcy law. For farming operations, the aggregate debt limit is $10,000,000. And, for fishing operations, the aggregate debt limit is $2,044,225.

Moreover, for individual Chapter 12 cases, at least 50% of one’s income must come from the farming/fishing operation, and the debts must generally arise therefrom. Specifically, for individual farmers, more than 50% of their debt (excluding residential mortgages) must arise out of the farming operation. And, for individual fishermen, more than 80% of their debt (excluding residential mortgages) must arise out of the farming operation.

For business Chapter 12 cases, the business cannot be publically traded, must be at least 50% family owned and operated, and more than 80% of the business assets must relate to the farming/fishing operation.

Chapter 11 is available to both businesses and individuals. Importantly through there are few specific types of Chapter 11 debtors that get special treatment under the bankruptcy law, and the eligibility requirements vary for each. Specifically, a debtor whose primary business is the oeration of a single piece of income-producting property and who derives substantially all of its income from that property is a “single asset real estate” debtor (SARE).

To be a SARE debtor requires the operation of real property and the activities incidental thereto (other than residential real property with fewer than 4 residential units), and which generates substantially all of the gross income of a debtor who is not a family farmer.

Additionally, a Chapter 11 case is considered a “small business case” if it is filed by a “small business debtor” who has not elected subchapter 5. And, a Chapter 11 debtor is a “small business debtor” if they: (1) are engaged in commercial or business activities (excluding a single asset real estate business); and (2) have liquidated debts of not more than $2,725,625, of which at least 50% arose from the debtor’s business activities.

And finally, to be a debtor under subchapter 5 of the Small Business Reorganization Act (SBRA), one must: (1) make that election; (2) be engaged in commercial or business activities (excluding a single asset real estate business); and (3) have liquidated debts of not more than $7,500,000, of which at least 50% arose from the debtor’s business activities.

Discharge

A bankruptcy discharge releases the debtor from liability for certain specified types of debts.

Most types of pre-petition debts are capable of being discharge, including, but not limited to, credit cards, utilities, medical bills, old income taxes, deficiencies, lines of credit, rejected contract obligations, personal loans, personal guarantees, condo/HOA dues, mortgages and car loans.

Other types of debts are automatically non-dischargeable, such as, recent income taxes, 941 employee withholdings trust fund taxes, sales taxes, student loans (with some exceptions), child support and alimony.

And, what’s more, a debtor does not always have an absolute right to discharge. For example, the Court may deny discharge as to a specific debt if a creditor, trustee or the United States Trustee timely files a non-dischargeability complaint within 60 days from the first scheduled meeting of creditors for debts incurred by fraud or other maliciousness. Moreover, the Court may deny a Chapter 7 discharge in its entirety, if the trustee or United States Trustee timely files a non-dischargeability complaint within 60 days from the first scheduled meeting of creditors for reasons such as providing false information, or transferring/concealing property with the intent to hinder, delay or defraud the trustee or creditors.

Also notably, a slightly broader discharge of debts is available to Chapter 13 debtors as opposed to Chapter 7 debtors. For example, debts for willful and malicious injury to property and debts arising from property settlements in divorce or separation proceedings are dischargeable in a Chapter 13 case, but not in a Chapter 7 case.

In Chapter 7, a discharge is only available to individual debtors, not to business debtors. And, in Chapter 11 and Chapter 12, a discharge is available to both individual and business debtors.

In Chapter 7, an individual debtor can expect to receive their discharge after the expiration of 60 days from the date first set for the meeting of creditors. In Chapter 12, Chapter 13 cases and non-consensual subchapter 5 cases, the debtor can expect to receive their discharge as soon as practicable after completing all payments under the plan. In consensual subchapter 5 cases, the debtor can expect to receive their discharge at confirmation. And, in non-subchapter 5 Chapter 11 cases, a business debtor can expect to receive their discharge upon confirmation, and an individual debtor after completing all payments under the plan.

Chapter 7 is available to both individuals and businesses. It enables individuals to, among other things, assume or reject contracts and to discharge most types of pre-petition debts, including, but not limited to, credit cards, utilities, medical bills, old income taxes, deficiencies, lines of credit, rejected contract obligations, personal loans, personal guarantees, condo/HOA dues, mortgages and car loans. Moreover, while Chapter 7 is considered a liquidation form of bankruptcy, broad exemption laws oftentimes allow debtors to keep all of their assets.

For businesses, a Chapter 7 bankruptcy puts a clean end to the business through a transparent and orderly liquidation. Upon filing, the business entity is terminated, and the trustee acquires control over all property of the estate, and liquidates same.

Chapter 7 does not have any income eligibility limitations for businesses. For individuals, on the other hand, there are eligibiltiy limitations based upon income. Specifically, if, a person’s income is such that their Chapter 7 filing constitutes an abuse, then the bankruptcy court may dismiss or convert the case to a repayment plan under Chapter 13 or Chapter 11 of the Bankruptcy Code.

To determine an individual’s eligibility for Chapter 7, they must first pass a threshold test in which one’s current monthly income, as defined by the Bankruptcy Code, is compared to the average median income of a household of the same size, residng in the same state. If below-median, then the individual is automatically eligible to file for Chapter 7 bankruptcy. If above-median, however, the individual most complete the means test in order to determine eligibility. The means test consists of an intricate formula of income minus expenses. If, after completing this formula, a person has too much monthly net disposable income left over, abuse is presumed; and, unless the person can rebut this presumption, they will be ineligible to file for Chapter 7. Notably though, some individuals are not subject to the Chapter 7 means test (e.g. individuals with primarily non-consumer debts, certain disabled veterans).

In Chapter 7, a discharge is only available to individual debtors, not to business debtors. And, unless a party in interest files a complaint objecting to the discharge or a motion to extend the time to object, the bankruptcy court will generally issue a discharge after the expiration of 60 days from the date first set for the meeting of creditors. For businesses, whatever debt remains after the trustee’s liquidation theoretically remain in existence until applicable statutory periods of limitations expire. Nonetheless, the trustee’s liquidation of the business renders the debts uncollectible.

Chapter 11 enables debtors, both individuals and businesses alike, to, among other things, save real property from foreclosure by curing delinquent mortgage and property tax payments over time, avoid eviction, assume or reject contracts, modify secured claims, including sometimes mortgage liens encumbering a principal residence, and to discharge most types of pre-petition debts, including, but not limited to, credit cards, utilities, medical bills, old income taxes, deficiencies, lines of credit, rejected contract obligations, personal loans, personal guarantees, condo/HOA dues, mortgages and car loans.

In a traditional Chapter 11 case there are no debt limits or other eligibility requirements.

While the case is pending, the debtor remains in exclusive possession and control of all property of the estate, and is empowered to use, sell or lease such property, even outside the ordinary course of business upon Court approval. There is no automatic appointment of a trustee. There is no co-debtor stay.

In a traditional chapter 11 case, the debtor has 120 days exclusivity to file a plan, but has no specific deadline by which to do so. Creditors vote to confirm a chapter 11 plan. Generally, to achieve court approval (confirmation) in a traditional chapter 11 case, the plan must:

  • Have at least one impaired class of creditors vote in favor of confirmation
  • Be proposed in good faith
  • Be feasible
  • Not unfairly discriminate against any impaired non-consenting class
  • Provide that all priority unsecured claims are paid in full over the 3-5 year plan term (e.g. recent taxes, domestic support obligations, administrative claims, etc.)
  • Satisfy the “Best Interest Test” by providing that general unsecured claims are to be paid at least what they would receive in a hypothetical chapter 7 liquidation
  • Satisfy the “Best Efforts Test” by providing that general unsecured claims are to be paid at least all of the debtor’s projected disposable income over the 3-5 year plan term
  • Satisfy the “Absolute Priority Rule” where equity interests are not retained unless general unsecured creditors are paid in full.

**Note - There is a split of authority as to whether the absolute priority rule applies in individual Chapter 11 cases. Currently, there is no binding authority in the Third Circuit on the issue.

And, finally, a business debtor will generally receive a discharge upon confirmation. Whereas, an individual debtor will generally receive a discharge after the debtor completes all payments under the plan.

Importantly though, there are certain specific types of chapter 11 debtors that get special/different treatment under the bankruptcy law. They are: (1) the “single asset real estate” debtor; and (2) the “small business debtor;” and (3) the “subchapter 5” debtor.

Single Asset Real Estate Debtor (SARE)

A chapter 11 debtor is a “single asset real estate” debtor (SARE) if: (1) their primary business is the operation of a single piece of income-producting property (other than residential real property with fewer than 4 residential units or a family farmer); and (2) substantially all of the debtor’s income is derived from that property.

Creditors of a single asset real estate debtor, particularly those foreclosing on the real property, can obtain relief from the automatic stay in circumstances not available to creditors in traditional chapter 11 cases. Specifically, upon a creditor’s request, the court will grant relief from the automatic stay if the debtor has not, within 90 days from the petition date, either: (1) filed a feasible plan; or (2) begins making interest payments to the creditor in an amount equal to the non-default contract interest rate on the value of the creditor's interest in the real estate. If a SARE debtor fails to satisfy these requirements, the court is likely to grant a secured creditor relief from the automatic stay, which will permit the creditor to commence or continue with a foreclosure of the real property.

Small Business Debtor

A Chapter 11 debtor is a “small business debtor” if the debtor: (1) is engaged in commercial or business activities (excluding SARE); (2) has liquidated debts of not more than $2,725,625, of which at least 50% arose from those business activities; and (3) did not elect to be a subchapter 5 debtor.

A small business debtor has 180 days exclusivity to file a plan, and must do so by the drop dead deadline of 300 days from the petition date.

Subchapter 5 Debtor

On February 19, 2020, the Small Business Reorganization Act (SBRA) went into effect. The SBRA created a new type of Chapter 11 debtor that gets special/different treatment under the bankruptcy law – a “subchapter 5” debtor. Subchapter 5 was enacted for purposes of creating a new streamlined and less costly Chapter 11 option for those engaged in a small business activities, both individuals and businesses alike.

Subchapter 5 enables debtors, both individuals and businesses alike, to, among other things, save real property from foreclosure by curing delinquent mortgage and property tax payments over time, avoid eviction, assume or reject contracts, modify secured claims, including sometimes mortgage liens encumbering a principal residence, and to discharge most types of pre-petition debts, including, but not limited to, credit cards, utilities, medical bills, old income taxes, deficiencies, lines of credit, rejected contract obligations, personal loans, personal guarantees, condo/HOA dues, mortgages and car loans.

For a Chapter 11 debtor to be a subchapter 5 debtor, the debtor must: (1) elect to be a subchapter 5 debtor; (2) be engaged in commercial or business activities (excluding a single asset real estate business); and (3) have liquidated debts of not more than $7,500,000, of which at least 50% arose from the debtor’s business activities.

While the case is pending, the debtor remains in exclusive possession and control of all property of the estate, and is empowered to use, sell or lease such property, even outside the ordinary course of business upon Court approval. A trustee is automatically appointed to all subchapter 12 cases. The trustee is charged with, among other things, investigating the debtor’s financial affairs, facilitating plan confirmation and, in certain circumstances, act as disbursing agent for certain of the debtor’s plan payments. There is no automatic appointment of an unsecured creditor committee in subchapter 5, no quarterly fees due to the United States Trustee, and no absolute priority rule. Also, within 60 days of the filing, a status conference will be held to help facilitate an expeditious and economical resolution of the case. And, at least 14 days in advance of the status conference, the debtor must file a status report detailing its efforts to attain a consensual plan of reorganization.

A subchapter 5 debtor has perpetual exclusivity to file a plan, and must do so within 90 days of the petition date. Creditors vote on confirmation of the plan. But, a plan can still be confirmed even when all classes of creditors vote against it. Generally, to achieve court approval (confirmation), the plan must:

  • Be proposed in good faith
  • Be feasible
  • Not unfairly discriminate against any impaired non-consenting class
  • Provide that all priority unsecured claims are paid in full over a 3-5 year plan term (e.g. recent taxes, domestic support obligations, administrative claims, etc.)
  • Satisfy the “Best Interest Test” by providing that general unsecured claims are to be paid at least what they would receive in a hypothetical Chapter 7 liquidation
  • Satisfy the “Best Efforts Test” by providing that general unsecured claims are to be paid at least all of the debtor’s projected disposable income over a 3-5 year plan term

If the plan is consensual, the debtor will receive a discharge immediately upon confirmation. If the plan is non-consensual, then a discharge is entered after completion of all payments required in the commitment period.

 

Chapter 12 enables farmers and fishermen debtors, both individuals and businesses alike, to, among other things, save real property from foreclosure by curing delinquent mortgage and property tax payments over time, avoid eviction, assume or reject contracts, modify secured claims, including sometimes mortgage liens encumbering a principal residence, and to discharge most types of pre-petition debts, including, but not limited to, credit cards, utilities, medical bills, old income taxes, deficiencies, lines of credit, rejected contract obligations, personal loans, personal guarantees, condo/HOA dues, mortgages and car loans.

To be eligible for Chapter 12, a debtor must have regular annual income, as well as debts that do not exceed the debt limits set by the bankruptcy law, which are much more generous than the debt limits for Chapter 13 and subchapter 5 cases. For farming operations, the aggregate debt limit is $10,000,000. And, for fishing operations, the aggregate debt limit is $2,044,225. Also, for business Chapter 12 cases, the business cannot be publically traded, must be at least 50% family owned and operated, and more than 80% of the business assets must relate to the farming/fishing operation. And, for individual Chapter 12 cases, at least 50% of one’s income must come from the farming/fishing operation, and the debts must generally arise therefrom. Specifically, for individual farmers, more than 50% of their debt (excluding residential mortgages) must arise out of the farming operation. And, for individual fishermen, more than 80% of their debt (excluding residential mortgages) must arise out of the farming operation.

While the case is pending, the debtor remains in exclusive possession and control of all property of the estate, and is empowered to use, sell or lease such property, even outside the ordinary course of business upon Court approval. A trustee is automatically appointed to all Chapter 13 cases. The trustee is charged with, among other things, investigating the debtor’s financial affairs, facilitating plan confirmation and act as disbursing agent for certain of the debtor’s plan payments. There is a co-debtor stay.

In a Chapter 12, the debtor has perpetual exclusivity to file a plan, and must do so within 90 days of the date of the petition date. Creditors do not vote to confirm a Chapter 12 plan. Instead, creditors receive notice of the confirmation hearing and are afforded the right to object. Generally, to achieve court approval (confirmation), the plan must, among other things:

  • Be proposed in good faith
  • Be feasible
  • Provide that all priority unsecured claims are paid in full over the 3-5 year plan term (e.g. recent taxes, domestic support obligations, administrative claims, etc.)
  • Satisfy the “Best Interest Test” by providing that general unsecured claims are to be paid at least what they would receive in a hypothetical Chapter 7 liquidation
  • Satisfy the “Best Efforts Test” by providing that general unsecured claims are to be paid at least all of the debtor’s projected disposable income over the 3-5 year plan term

And finally, once the debtor completes all plan payments, the court will grant a discharge.

Chapter 13 enables individual debtors (including sole proprietors) to, among other things, save real property from foreclosure by curing delinquent mortgage and property tax payments over time, avoid eviction, assume or reject contracts, modify secured claims, including sometimes mortgage liens encumbering a principal residence, and to discharge most types of pre-petition debts, including, but not limited to, credit cards, utilities, medical bills, old income taxes, deficiencies, lines of credit, rejected contract obligations, personal loans, personal guarantees, condo/HOA dues, mortgages, car loans and debts arising from property settlements in divorce or separation proceeding.

Chapter 13 does not have any income based eligibility limitations. Rather, all individuals are generally eligible for Chapter 13 provided they earn regular income and have debts that do not exceed the debt limits set by the bankruptcy law. Specifically, to qualify as a Chapter 13 debtor, one must have less than $419,275.00 in unsecured debts and $1,257,850.00 in secured debts.

While the case is pending, the debtor remains in exclusive possession and control of all property of the estate, and is empowered to use, sell or lease such property, even outside the ordinary course of business upon Court approval. A trustee is automatically appointed to all Chapter 13 cases. The trustee is charged with, among other things, investigating the debtor’s financial affairs, facilitating plan confirmation and act as disbursing agent for certain of the debtor’s plan payments. There is a co-debtor stay.

In a Chapter 13, the debtor has perpetual exclusivity to file a plan, and must do so within 14 days of the date of the petition date. Creditors do not vote to confirm a Chapter 13 plan. Instead, creditors receive notice of the confirmation hearing and are afforded the right to object. Generally, to achieve court approval (confirmation), the plan must, among other things:

  • Be proposed in good faith
  • Be feasible
  • Provide that all priority unsecured claims are paid in full over the 3-5 year plan term (e.g. recent taxes, domestic support obligations, administrative claims, etc.)
  • Satisfy the “Best Interest Test” by providing that general unsecured claims are to be paid at least what they would receive in a hypothetical Chapter 7 liquidation
  • Satisfy the “Best Efforts Test” by providing that general unsecured claims are to be paid at least all of the debtor’s projected disposable income over the 3-5 year plan term

And finally, once the debtor completes all plan payments, the court will grant a discharge. And, notably, a slightly broader discharge of debts is available to Chapter 13 debtors as opposed to Chapter 7 debtors. For example, debts arising from property settlements in divorce or separation proceedings are dischargeable in a Chapter 13 case, but not in a Chapter 7 case.