Bankruptcy Options

Before filing a bankruptcy, the Debtor must determine which chapter of bankruptcy would best serve its interest. In making this decision, the Debtor should consider the following questions:

1. Which Chapters are available to me?

  • The choices typically available are Chapter 7, Chapter 13, Chapter 11, and Chapter 12.
  • Chapter 7 is typically the best choice if the Debtor is current on its payments for house and vehicles, does not have non-exempt equity, does not flunk the means test (i.e., too much income), and is not trying to keep a business.
  • Chapter 13 is typically the best choice if the Debtor is behind on house, vehicles, or furniture and wants to keep these assets. Also, if the Debtor flunks the means test, the Debtor will have to use the Chapter 13. If the Debtor wishes to repay all or a portion of its debts, the Chapter 13 will be the best choice.
  • Chapter 11 is typically used for individuals or businesses that have significant assets, have too much debt to reorganize under a Chapter 13 case, do not qualify as an individual under Chapter 13 such as a corporation, and who do not wish to liquidate their assets. The typical use of Chapter 11 is for corporations that wish to remain in business but need protection while they reorganize their debts. This is usually not a proper choice for individuals and small businesses because of the enormous expense involved in pursuing a successful Chapter 11 reorganization.
  • Chapter 12 is typically used for family farmers that do not have too much debt. This Chapter operates similar to a Chapter 13, but is tailored more for the family farmer or fisherman. If the farmer/fisherman has too much debt or otherwise does not qualify for a Chapter 12, the Chapter 11 probably would be the best choice.

2. Does it make a difference if the Debtor’s debts are primarily consumer debts or primarily business related debts?

  • The simple answer is yes. The Debtor abuse statutes related to the means test only apply to consumer debts. They do not apply to cases that are primarily business related debts. This means that if the debts are mostly business related, the Debtor can file a Chapter 7 even if it would otherwise flunk the means test.
  • A consumer debt is a debt incurred by an individual primarily for a personal, family, or household purposes.

3. If I start under one Chapter of bankruptcy can I convert to another chapter if it later proves necessary?

  • Yes, you can convert between the chapters, but this right has been determined not to be an absolute right. In other words, if you start as a Chapter 13 and lose income such that the plan is no longer feasible, it is possible to convert to a Chapter 7 and start over. Also, if you start as a Chapter 7 and then decide that you need to try to keep your vehicle or house, it is possible to convert to a Chapter 13 and propose payments to keep the asset. On the other hand, if you start as a Chapter 7 and then the Chapter 7 Trustee identifies an asset to liquidate, you may or may not be able to convert to Chapter 13 to protect the asset.

4. Does it make a difference if I am in business for myself and I want to remain in business?

  • Very likely it does make a difference. If you are a sole proprietor with few assets and the business is dependent upon you to generate income, then you may be able to file a Chapter 7 and remain in business. On the other hand, if your business holds many assets or is otherwise a profitable business without your service, a Chapter 7 may be risky in that the Trustee may be able to take control of the business and sell it to pay your unsecured creditors. If a Chapter 7 will not work for you, you can probably file a personal Chapter 13 and hold the business in tact and operational.