Filing bankruptcy is a last resort for most people. People in debt try to avoid bankruptcy by “tightening their belts” to reduce monthly expenses so the debts can be repaid over a period of time. Other people try increasing monthly income by working overtime or a second job. Some sell their jewelry, cars, or other personal property. Bank loans are another source of money to pay existing debts. If the debtor is lucky, they can obtain a loan from the “Bank of Mom & Dad.”
Not every individual qualifies for Chapter 7 bankruptcy relief – so alternatives must be considered. A bankruptcy court could dismiss a Chapter 7 case filed by an individual whose debts are primarily consumer debts if the court finds that the granting of relief would be an abuse of the bankruptcy laws. 11 U.S.C. § 707(b). But attorney Robert Schaller asks the question: what is considered abusive? The Bankruptcy Code applies a “means test” to determine whether a Chapter 7 filing is presumptively abusive when the debtor’s “current monthly income” is more than the state median. Abuse is presumed if the debtor’s aggregate current monthly income over 5 years, net of certain statutorily allowed expenses, is more than the lesser of (i) $10,000, or (ii) 25% of the debtor’s nonpriority unsecured debt, or $6,000, whichever is greater. 11 U.S.C. § 707(b). The debtor may rebut a presumption of abuse only by a showing of special circumstances that justify additional expenses or adjustments of current monthly income. Unless the debtor overcomes the presumption of abuse, the case would generally be converted to Chapter 13 (with the debtor’s consent) or would be dismissed (if the debtor withholds consent). See 11 U.S.C. § 707(b).
Individual debtors who fail the “means test” and have regular income may be denied Chapter 7 relief but allowed an adjustment of debts under Chapter 13 of the Bankruptcy Code. A particular advantage of Chapter 13 is that it provides individual debtors with an opportunity to protect their vehicles from repossession and save their homes from foreclosure by allowing them to “catch up” past due payments through a payment plan.
Attorney Robert Schaller notes that debtors who are engaged in business should be aware that there are several alternatives to Chapter 7 relief, including Chapter 11 and Chapter 13. Business debtors include sole proprietorships, corporations, LLCs, and partnerships. Business debtors may prefer to remain in business and avoid liquidation. Sole proprietorships may be eligible for relief under Chapter 13 of the Bankruptcy Code. Chapter 13 enables a debtor to retain valuable business assets, such as vehicles and equipment, reject burdensome leases, and propose a “plan” to repay creditors over time – usually three to five years. Corporations, partnerships, LLCs, and some individuals should consider filing a petition under Chapter 11 of the Bankruptcy Code. Under Chapter 11, the debtor may seek an adjustment of debts, either by reducing the debt or by extending the time for repayment, or the debtor may seek a more comprehensive reorganization.
The National Bankruptcy Academy offers both online and live programs tailored to attorneys who are (a) expanding their current practice into the lucrative field of bankruptcy law, (b) training support staff to assist in the production of bankruptcy documents, and (c) for existing bankruptcy professionals, sharpening their technical skills with in-depth analysis and citation support from case law, the Bankruptcy Rules, and the Bankruptcy Code. Visit the Academy at https://nationalbankruptcyacademy.com/ or talk to tax attorney Robert Schaller at https://schallerlawfirm.com/.