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CONSUMER
BANKRUPTCY
The stereotype of consumer bankruptcy brings to mind consumers using credit to support a lifestyle beyond their means, buying expensive cars, electronics, jewelry, and other luxury goods that they simply cannot afford.
In some cases, this is true. But “consumer bankruptcy” actually refers to any individual facing insolvency for any reason. Because consumer bankruptcy involves individual debtors, it is distinct from business bankruptcy, but a closely-held business in financial distress can easily begin to affect the business owner’s personal finances. Some examples include:
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A small business owner is asked for a personal guarantee when signing a multi-year commercial lease. The business owner provides the guarantee, thinking that it’s actually the business that will be paying the monthly rent. However, due to circumstances beyond the owner’s control, the business fails and must vacate the premises. Now the owner is personally on the hook for paying the remaining balance owed on the commercial lease.
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In order to raise capital for the family business, a business owner provides a personal guarantee on a business loan. The plan is to have the business pay off the loan. However, when the business fails, the business loan is now the business owner’s personal financial responsibility, and with no income from the business, the owner is facing insolvency.
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A business owner relies on income from the business as a sole means of support. The business owner is careful with finances, but a recession dramatically reduces the business’s receipts, and suddenly the owner’s personal income is virtually non-existent, which jeopardizes the owner’s ability to meet personal financial commitments.
When personal debt becomes overwhelming, the debtor may be facing a difficult choice—should they file for bankruptcy?
Typically, bankruptcy is viewed as a financial specter that both debtors and creditors fear alike. For debtors, bankruptcy may be seen as a failure, to be avoided at all costs.
For creditors, the fear is that they might never be paid. Add up enough bad debt, and the creditor itself might go under. That’s what happened in 2008, when Lehman Brothers went bankrupt, and was nearly joined in bankruptcy by Merrill Lynch, AIG, Freddie Mac, and Fannie Mae.
In reality, however, bankruptcy is a powerful tool for minimizing the damage when a debtor is unable to pay their debts. This was the intent of the founders of this nation, who sought to establish an approach to insolvency that would encourage the blossoming of national commerce and economic growth, and reduce the drag of insolvency on that growth, while still respecting the rights of the insolvent debtor’s creditors.
The result today is a framework of laws that encourages robust economic activity, while discouraging the kinds of reckless and lawless behavior that lead to financial ruin.
The Main Types of Consumer Bankruptcy
The main types of consumer bankruptcy are Chapter 13 Reorganization and Chapter 7 Liquidation. Additionally, individual debtors may choose to file for individual bankruptcy protection under Chapter 11 Reorganization. Each of these chapters provide different debtor protections in bankruptcy, and the individual circumstances of the consumer debtor will determine which chapter best fits the debtor’s situation.
CHAPTER 13 REORGANIZATION
Chapter 13 gives individuals who are in financial distress an opportunity for a fresh start by restructuring their debt payments. Under Chapter 13 bankruptcy, a consumer who has a regular income can set up a court-approved payment plan for repaying their debts. These payment plans, also known as “wage earner plans,” enable the individual debtor to pay off either all or a portion of their debt, over either a three year period, or five year period.
Chapter 13 reorganization offers several advantages to individual debtors, including:
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Enables the individual debtor to stop foreclosure on the debtor’s home;
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Enables the individual debtor to recover a repossessed car;
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Stops wage garnishment;
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Enables the individual debtor to reschedule secured debt payments and extend them over the life of the three or five year reorganization plan;
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Chapter 13 reorganization is similar in function to a loan consolidation. Under Chapter 13 reorganization, you make payments on your debt to a Chapter 13 Trustee, who then distributes the payment plan payments to your creditors;
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Under Chapter 13 reorganization, the Chapter 13 Trustee deals directly with your creditors. You don’t deal directly with your creditors while you are under the protection of Chapter 13;
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Under Chapter 13 reorganization, an automatic stay is placed on collections; both creditors and collections agencies are prohibited from starting or continuing collections efforts;
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Any debts not fully repaid at the end of the wage earner’s plan are discharged, giving the individual debtor a fresh financial start.
CHAPTER 11 REORGANIZATION
Chapter 11 Reorganization, which is similar to Chapter 13 Reorganization, is typically used for Business Bankruptcies. However, it can also be used for an individual bankruptcy, and under certain circumstances, may be preferable to filing for bankruptcy under Chapter 13.
Chapter 11 Reorganization for individuals differs from Chapter 13 Reorganization in the following ways:
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Chapter 13 imposes a cap on debts owed; Chapter 11 does not have a cap on debts. Similarly, Chapter 13 requires an individual debtor to have regular income; Chapter 11 does not have an income requirement. Thus, an individual debtor who is not eligible for Chapter 13 Reorganization may still be eligible for bankruptcy protection under Chapter 11 Reorganization. However, it costs more to file and administer a Chapter 11 bankruptcy.
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Under Chapter 11, the individual debtor must usually close all prepetition bank accounts, and open new “Debtor-In-Possession” Bank accounts.
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Under Chapter 13, a chapter 13 trustee oversees the bankruptcy case in the interests of the debtor’s unsecured creditors. Under Chapter 11, there is usually no trustee to oversee the case (with the exception of bankruptcies involving fraud or mismanagement), but the individual debtor has a fiduciary duty to manage the case in the interests of the creditors.
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Under Chapter 13, a “Means Test” helps determine whether your payment plan will last 3 years or 5 years, and how much of your disposable income must go towards repaying your creditors. Under Chapter 11, a Means Test is also used, but the Chapter 11 Means Test is much simpler, and only requires that the debtor’s current monthly income be calculated.
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Under Chapter 13, a chapter 13 plan must be filed within 14 days of filing the petition for Chapter 13 Reorganization, and payments usually begin 30 days after the plan is filed. Under Chapter 11, there isn’t a mandatory deadline for filing the plan, however, the plan must be voted on by the creditors, and approved by the Bankruptcy Court. Payments only begin after the Bankruptcy Court approves the plan.
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Under Chapter 13, the payment plan must not last longer than 5 years. Under Chapter 11, there is no time limit for how long a payment plan can last. This lack of a time limit makes it possible to spread out some payments over much longer time frames than Chapter 13 would allow for. However, taxes owed must be paid wthin 5 years of filing, and domestic support obligations must be fully paid when the plan is approved.
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Under Chapter 13, all debts not fully repaid at the end of the wage earner’s plan are discharged. Under Chapter 11, debts cannot be discharged until all of the payments agreed to in the plan have been made.
CHAPTER 7 LIQUIDATION
Under Chapter 7, the individual debtor’s assets are liquidated, and the proceeds are used to pay the creditors. Chapter 7 liquidation offers several advantages to individual debtors, including:
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When an individual debtor files for consumer bankruptcy protection under Chapter 7, an automatic stay will take effect, preventing the debtor’s creditors from starting, or continuing, collection efforts. The phone calls and letters demanding payment will stop. If the debtor’s wages are being garnished, the wage garnishment will stop. The automatic stay is enforced by the bankruptcy court, giving the individual debtor the breathing room to get back on their feet financially.
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The debtor’s unsecured debt is discharged in Chapter 7. When debt is discharged in bankruptcy, the debtor is relieved by the bankruptcy court from their obligation to repay the debt, giving the individual debtor a fresh start, free from crippling debt.
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The debtor’s exempt assets are protected from liquidation. The list of exempt assets is extensive. Some of the qualifying assets that can be exempted from liquidation may include your home; your car; your wages; funds deposited in your bank account; social security payments; pension and retirement benefits; disability benefits; unemployment benefits; public assistance benefits; student financial aid; workers compensation benefits; alimony; child support; household items and personal effects; jewelry and heirlooms, clothing; household goods; appliances; furnishings; tools, books, and implements of trade; health aids; animals; musical instruments; and books. There are dollar amount limits to what may be exempted from liquidation, but the goal of Chapter 7 liquidation is to balance repaying creditors with protecting the basic life necessities of the individual debtor.
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Under Chapter 7, there is no court-approved repayment plan for the individual debtor. Instead, the debtor’s non-exempt assets are sold by the bankruptcy trustee, and the proceeds are used to pay the secured debt of the individual debtor’s creditors. Any secured debt remaining after liquidation is discharged in bankruptcy.
Out-of-Court Workouts
Another approach to insolvency that may be available to an individual debtor is the out-of-court workout. In an out-of-court workout, the debtor reaches an agreement with one or more creditors without filing for bankruptcy protection. This approach is an appealing option for debtors with the means to pay their debts under an agreed-upon plan, because the plan is a private agreement, and thus, keeps the debtor out of bankruptcy court. It can also be an appealing option for creditors, because the creditor ends up with an enforceable plan that doesn’t subject the creditor to the limitations the creditor would face in bankruptcy court. If the debtor has the means to commit to an out-of-court workout, this approach may be a win-win for both debtor and creditor.
Don't Wait - Take Action Now
Entrepreneurs are driven to succeed. But as every entrepreneur knows, with every opportunity comes risk, and that risk can affect not just the business enterprise, but also the business owner. When your business is in financial distress, and that begins to affect your personal finances, you need to understand what your options are, and take appropriate action before things get worse.
Delay will only make things worse. A consultation with Nichani Law Firm is your first step in understanding your options. From there, we can help you develop a plan of action that best fits your circumstances and objectives. Nichani Law Firm represents both companies and individual debtors in bankruptcy and financial disputes. Our team consists of highly experienced bankruptcy practitioners who offer workable solutions for debtors, including liquidation, restructuring, reorganization, and out-of-court workouts.
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Consumer Chapter 13 Bankruptcy
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Individual Chapter 11 Bankruptcy
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Consumer Chapter 7 Liquidation
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Out-of-court Workouts and Debt Restructuring
SERVICES OFFERED
Include Legal Representation For Creditors and Debtors in:
NICHANI LAW FIRM
YOUR SILICON VALLEY BANKRUPTCY SOLUTIONS TEAM
Nichani Law Firm is a boutique Silicon Valley business and commercial litigation law firm, providing legal representation with a commitment to exceptional service, high-caliber solutions, and a deep focus on Business and Commercial Litigation, Bankruptcy Restructuring and Litigation, Creditor Rights and Remedies, and White Collar Criminal Defense. In every dispute, whether large or small, simple or complex, we will provide representation custom-tailored to meet your objectives. As your representative, we will zealously advocate your position, whether in an Alternative Dispute Resolution process, or at trial. Nichani Law Firm has successfully represented a variety of businesses throughout Silicon Valley and the Greater San Francisco Bay Area. We also serve as local counsel in Silicon Valley and the Greater San Francisco Bay Area for out-of-state attorneys and out-of-area companies, whether based in another region of California, another state, or another country—with business interests in Silicon Valley and the Greater San Francisco Bay Area.
For a consultation, contact Nichani Law Firm.
DEBT RELIEF
Nichani Law Firm practices bankruptcy law and is considered a debt relief agency by federal law. We help businesses and individuals file for bankruptcy relief under the United States Bankruptcy Code.
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