Due to COVID-19, record numbers of businesses, families and individuals are struggling to fulfill their debt obligations. Filing for bankruptcy can be a very helpful tool, with several options available.
Chapter 7: Individuals and families
Chapter 7 can be a quick, easy way to eliminate credit card debt, tax debt, personal loans, old balances from car repossessions and early termination of apartment leases. There is no limit on the amount of debt that Chapter 7 can eliminate.
Chapter 7 does not mean that individuals and families must give up their home, cars, jewelry, bank accounts or other assets.
To qualify, income after expenses must be at most $100 and household income generally must be below the median income for the household size, which is called the “Means Test.” Household income includes income from a live-in spouse, even if the spouse is not filing for bankruptcy.
Chapter 7: Businesses
Chapter 7 means an orderly, court-overseen operations winddown of a business that has elected to close. Without bankruptcy protection, landlords, commercial equipment lenders and line of credit lenders, could seize assets and receive larger sums.
If a business has $50,000 of tax debt and $50,000 in a bank account, bankruptcy may allow the business to pay the taxes before an unsecured line of credit.
Outside of bankruptcy, the line of credit lender can garnish the bank account and may act more quickly than the IRS or State of Maryland. However, if the taxes are considered priority debt in bankruptcy, the bank account holding $50,000 would be paid towards the taxes while the line of credit lender will receive nothing.
Individuals and families are the only entities eligible for Chapter 13. Unlike Chapter 7, the debtor makes payments every month for three to five years, in amounts of nothing to 100 percent.
Chapter 13 is a good choice in the following circumstances:
– the debtor’s income is over-median and cannot meet the Means Test
– the debtor does not have many expenses,
– the debtor has valuable assets to protect, or
– the debtor could benefit from restructuring debt.
Chapter 13 also offers advantages over Chapter 7 if the debtor wishes to restructure secured debt. Consider this scenario: the debtor’s mortgage is $300,000, the home is worth $275,000, and there’s a home equity line of credit for $50,000. In Chapter 13, the home equity line can be stripped off, meaning that after the bankruptcy is over, the home equity line is eliminated.
Often, Chapter 13 is used to save a home from foreclosure, which otherwise could be implemented after three months of missed mortgage payments. Once foreclosure has started, many lenders refuse to accept anything other the total amount of arrears owed on the home. If the debtor owes $10,000 on the home, he/she can file a Chapter 13 to stop the foreclosure, and then pay the $10,000 over three to five years.
The most complex, yet powerful chapter of bankruptcy, Chapter 11 can help small businesses, families and individuals. It carries a minimum five-year plan in which the debtor proposes a plan of reorganization to the court and creditors. Instead of a trustee, the debtor manages its own affairs and is a debtor-in-possession.
Chapter 11 may be a better option due to debt limits or certain restructuring tools not available in Chapter 13. Also, a Chapter 11 plan can last as long as the debtor needs, whereas a Chapter 13 plan is limited to five years.
- Named to Super Lawyers 2020, Eric Steiner has helped business and consumer clients throughout Maryland discharge millions of dollars of debt. His practice focuses on commercial and consumer bankruptcy, and commercial litigation. As managing member of Steiner Law Group, LLC – a Baltimore law firm that is NGLCC certified as an LGBT-owned business, Mr. Steiner takes pride in counseling clients with compassion, empathy and understanding, while acting as a zealous advocate for them during times of difficulty. He also serves as secretary of the LGBTQ Bar Association of Maryland, a member of the Maryland LGBT Chamber of Commerce and a council member of the MSBA’s Consumer Bankruptcy Section. For more information, visit www.steinerlawgroup.com.