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Understanding Bankruptcy Options

Chapter 7

Chapter 7 bankruptcy deals with asset liquidation, which means selling all non-exempt assets by a court-appointed trustee. There is no plan of repayment.

Chapter 13

This chapter of the Bankruptcy Code provides for adjustment of debts of an individual with regular income. Chapter 13 allows a debtor to keep property and pay debts over time.

Chapter 11

A chapter 11 debtor usually proposes a plan of reorganization to keep its business alive and pay creditors over time. People in business or individuals can also seek relief in chapter 11.

Chapter 7 Bankruptcy

Chapter 7 bankruptcy is that section of the U.S. Bankruptcy Code that deals with asset liquidation, which means the selling of all non-exempt assets by a court-appointed trustee, who applies the proceeds of the sale to pay your creditors. In return, a debtor receives a discharge, which releases a debtor from all dischargeable debts, and orders creditors to forever stop their attempts to collect the discharged debts.

Once a debt is discharged, a debtor is forever relieved of the obligation to pay a debt. Some debts cannot be discharged. A few examples include certain taxes, alimony, child support, student loans, debts not listed in the Chapter 7 bankruptcy petition, and debts incurred as a result of defrauding or misleading a creditor.

There are two criteria which determine your eligibility as a Long Island resident to file for Chapter 7 bankruptcy – assets and income.

With respect to assets, under New York State law, an individual is allowed to protect certain basic assets from their creditors. This is called exempt property, or exemptions. So long as the value of your assets do not exceed the statutory limitations, you have met this criteria.

With respect to income, under the Bankruptcy law, most individuals or couples filing for protection under Chapter 7 must now meet certain eligibility requirements under a “Means Test.”

Under the Means Test, you must first determine if your average monthly income, from all sources, for the six month period prior to filing is below the median income for your state, based upon the size of your household. If your average monthly income for the six month period prior to filing is below the median income for your state, you have passed the first hurdle, and so long as you meet the other eligibility requirements, you can file for protection under Chapter 7 bankruptcy.

If your average monthly income for the past six months is above the median income for your state, you must proceed to the second hurdle – do you have the ability to repay a portion of your debt?

The second hurdle is the determination of your ability to repay a portion of your debt. Under the Means Test, you are required to complete an analysis of your income and expenses (based upon the Internal Revenue Service guidelines for your state as well as certain actual monthly expenses that your may incur – such as mortgage or automobile loan payments). If, after completing the Means Test analysis, it is determined that your net disposable income is less than $200.00 per month, you have passed the second hurdle and you can proceed with your Chapter 7 bankruptcy filing so long as you meet the other requirements.

Chapter 13 Bankruptcy

Chapter 13 bankruptcy is primarily utilized by Long Island New York residential homeowners (including owners of co-ops and condos) who are in foreclosure to allow them to repay their mortgage arrears as well as all, or a portion of, their unsecured debts under the supervision and protection of the United States Bankruptcy Court.

While foreclosure remains the primary reason to file a Chapter 13 bankruptcy petition, individuals who may not be homeowners, or homeowners who are current on their mortgage obligations, but have incomes above the median income in New York and may not be eligible to file a petition for Chapter 7 bankruptcy can file a petition for Chapter 13 bankruptcy to effectively deal with their debts.

Chapter 13 bankruptcy is designed for working people with steady incomes who want to pay their debts but are currently overwhelmed with bills, judgments, lawsuits, and other financial issues. Even if you do not own a home, the filing of a Chapter 13 bankruptcy petition can assist you to regain control of your financial situation.

A Chapter 13 bankruptcy repayment plan allows an individual to repay mortgage arrears and some, or all, other their other debts (such as credit cards, medical bills, etc.), over a three to five year period. While a Chapter 13 plan is in effect, creditors cannot either start or continue their collection efforts, and they must accept what the plan pays them. Any individual, or married couple, even if self-employed, can receive Chapter 13 bankruptcy relief if they owe less than $1,184,000.00 in secured debt (i.e. mortgages, car loans, equity loans), and less than $389,000.00 in unsecured debt.

Chapter 11 Bankruptcy

Chapter 11 is typically used to reorganize a business, which may be a corporation, sole proprietorship, or partnership. Chapter 11 bankruptcy of a corporation (corporation as debtor) does not put the personal assets of the stockholders at risk other than the value of their investment in the company’s stock. 

A sole proprietorship, on the other hand, does not have an identity separate and distinct from its owners. A bankruptcy case involving a sole proprietorship includes both the business and personal assets of the owners. Like a corporation, a partnership exists separate from its partners. In a partnership bankruptcy case, however, the partners’ personal assets may, in some cases, be used to pay creditors in the bankruptcy case or the partners, themselves, may be forced to file for bankruptcy protection.

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