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.
Regardless of the type of bankruptcy filed, or whether the debtor is an individual or a business entity, the commencement of a bankruptcy case creates an “estate” comprised of the debtor’s property.
Generally, the estate includes all legal and equitable interests of the debtor as of the petition date, along with any “proceeds, product, offspring, rents, or profits” of such property, and any property the debtor acquires or becomes entitled to within 180 days after the petition date by way of inheritance, property settlement or divorce decree, or life insurance.
In certain instances, the definition of estate property is expanded. For example, in individual Chapter 11 and Chapter 13 cases, as well as in non-consensual Subchapter V small business Chapter 11 cases, the estate also includes post-petition earnings and property acquired after the petition date, until the case is dismissed, converted, or closed. In consensual Subchapter V small business cases, the estate likewise includes post-petition earnings and property, but only to the extent of what existed as of the confirmation date.
An automatic stay goes into effect immediately upon the filing of a bankruptcy petition. It applies to all bankruptcy chapters and to both individuals and businesses.
The automatic stay functions as a temporary restraining order, protecting the debtor, the debtor’s property, and property of the estate from creditor action. More specifically, the automatic stay halts nearly all efforts to enforce or collect a debt against the debtor, the debtor’s property, or estate property. Its purpose is to provide the debtor with breathing room and to promote the fair treatment of creditors through the bankruptcy process.
The scope of the automatic stay is broad. It will stop, among other things, foreclosures, repossessions, wage garnishments, collection lawsuits, lien attachments, and creditor harassment. However, the automatic stay does not stop everything. It does not halt criminal proceedings, driver’s license suspensions, certain commercial property evictions, the imposition of liens for property taxes, payroll deductions for retirement contributions, or most family law matters such as divorce, child custody, and paternity.
Also, in Chapter 7 and Chapter 11 cases, the stay does not extend to non-debtor parties. In contrast, in Chapter 13 and Chapter 12, the automatic stay may extend to qualifying co-debtors and co-signers.
There are limitations for repeat individual filers. If a prior case was dismissed within one year of the current filing, the automatic stay will only remain in place for 30 days unless the debtor successfully moves to extend it. If two prior cases were dismissed within one year, there is no automatic stay unless the debtor obtains a court order imposing it.
The stay remains in effect with respect to property of the estate until that property is no longer part of the estate. For all other actions, the stay continues until the earliest of the case being closed, dismissed, or a discharge being granted or denied.
Additionally, the automatic stay may be lifted or modified in certain circumstances by a successful motion for relief
A trustee is automatically appointed in all Chapter 7, Chapter 12, Chapter 13, and Subchapter V cases. In all other Chapter 11 cases that are not Subchapter V, a trustee is not automatically appointed but may be appointed upon request by a party in interest and order of the court.
The trustee acts as a fiduciary for the estate and is tasked with investigating the debtor’s financial affairs, among other duties. The scope of the trustee’s role varies depending on the bankruptcy chapter.
In Chapter 7, the trustee takes possession of estate property and is primarily responsible for “collecting and reducing to money the property of the estate… and closing such estate as expeditiously as is compatible with the best interests of the parties.”
In Chapter 12, Chapter 13, and Subchapter V cases, although a trustee is appointed, the debtor remains in possession of their assets and continues to manage their own financial affairs. The trustee’s role is generally to facilitate plan confirmation and, under certain conditions, act as disbursing agent for plan payments.
In non-Subchapter V Chapter 11 cases, the debtor also initially serves as a “debtor in possession.” However, if the court appoints a trustee, the debtor loses that status, and the trustee then assumes control of estate property, operates the business, and, if appropriate, proposes a reorganization plan.
All debtors in bankruptcy are required to attend a meeting of creditors, also known as a 341 meeting. This meeting serves as an examination of the debtor’s financial affairs and other matters relevant to case administration.
In Chapter 7, Chapter 12, and Chapter 13 cases, the meeting is conducted by the trustee. In Chapter 11 cases, it is conducted by a representative of the United States Trustee.
Creditors are invited to attend and may question the debtor under oath, although many do not appear. The debtor must provide valid identification at the meeting and affirm under oath that their testimony is truthful.
Chapter 7 is available to individuals and businesses. However, individuals must meet income-based eligibility requirements. If their income is too high, the case may be dismissed or converted to Chapter 11 or Chapter 13.
To determine eligibility, a debtor’s current monthly income is compared to the median income for a similarly sized household in their state. If the income is below the median, the debtor is eligible. If above the median, the debtor must complete a “means test” which subtracts allowable expenses from income. If too much disposable income remains, abuse is presumed unless the debtor can successfully rebut the presumption. Some individuals, such as those with primarily non-consumer debts or certain disabled veterans, are exempt from the means test.
Chapter 13 is only available to individuals (including sole proprietors) and does not have income-based limits. Instead, it imposes debt limits: less than $419,275 in unsecured debt and less than $1,257,850 in secured debt. Debtors must also have regular income.
Chapter 12 is available to individuals and businesses engaged in farming or commercial fishing. Debtors must have regular annual income and debts that do not exceed $10,000,000 for farming operations or $2,044,225 for fishing operations.
For individual Chapter 12 cases, more than 50% of income must come from the farming or fishing operation, and the debts must largely arise from that activity. For businesses, they must not be publicly traded, must be at least 50% family-owned and operated, and more than 80% of assets must relate to the farming or fishing business.
Chapter 11 is available to individuals and businesses. Certain Chapter 11 debtors receive special treatment:
A discharge in bankruptcy releases the debtor from personal liability for certain types of debts.
Most pre-petition debts are dischargeable, including credit cards, medical bills, utility bills, personal loans, contract rejections, old tax debts, deficiencies, personal guarantees, condo dues, and certain mortgage or auto loan obligations.
Some debts are non-dischargeable by law. These include recent income taxes, 941 trust fund taxes, sales taxes, child support, alimony, and most student loans (with limited exceptions).
In some cases, discharge can be denied. A creditor, trustee, or the United States Trustee may file a complaint objecting to discharge of a particular debt (or all debts in Chapter 7) within 60 days of the initial meeting of creditors. Grounds for denial include fraud, false statements, or hiding assets.
Chapter 13 offers a slightly broader discharge than Chapter 7. For example, debts for willful and malicious injury to property or debts from divorce property settlements may be discharged in Chapter 13, but not in Chapter 7.
In Chapter 7, only individuals—not businesses—are eligible for discharge. In Chapter 11 and Chapter 12, both individuals and businesses may receive a discharge.
In Chapter 7, an individual typically receives a discharge 60 days after the first date set for the meeting of creditors. In Chapter 12, Chapter 13, and non-consensual Subchapter V cases, the discharge is entered after the debtor completes plan payments. In consensual Subchapter V cases, the discharge is entered at confirmation. In non-Subchapter V Chapter 11 cases, business debtors receive their discharge at confirmation; individual debtors receive it after plan completion.