As the Covid-19 pandemic continues to disrupt the economy and bring about financial hardships for individuals and businesses, many are considering whether bankruptcy is an appropriate method to curb debt and ongoing losses in the face of mandated closures. Notably, in the first four (4) months of 2020, approximately 215,000 bankruptcy cases were filed across the country. These numbers are expected to rise as businesses remain closed and unemployment continues to sky-rocket. Understanding the basic tenets of bankruptcy will help business owners and individuals in making an informed decision as to whether bankruptcy debt relief is right for them.
Generally, bankruptcy is a legal proceeding whereby an individual’s or businesses’ debt is forgiven, and creditors have an opportunity to be repaid from the proceeds of the sale, or liquidation, of certain assets. A Chapter 7 bankruptcy is primarily used to discharge the debt of an individual or to liquidate a business if a bankruptcy court finds that you lack the means to repay your debt(s). Simply, the Chapter 7 bankruptcy process relieves an individual, or business, from the legal obligation to repay past-due expenses – the debt is discharged. While almost all debts will be discharged at the end of the bankruptcy process, child support, government debts such as taxes, fines, or penalties, and student loans will survive bankruptcy and remain due; however, property necessary to maintain basic living standards, including primary residences, personal possessions and motor vehicles, may be exempt and retained by the debtor.
In contrast, businesses typically file for Chapter 11 bankruptcy, the purpose of which is to reorganize its financial affairs via a debt repayment plan while still conducting business activities. Under this filing, the debtor remains in possession of the company’s assets and runs the business as usual, but while under the bankruptcy court’s supervision. Chapter 11 bankruptcy is often the most expensive bankruptcy proceeding as reorganization plans can be complex.
The Small Business Reorganization Act of 2019 (the “SBRA”) created a new subsection to Chapter 11, Subchapter V. It offers a faster and less costly Chapter 11 reorganization path that permits small business debtors to confirm a plan of reorganization without prior acceptance by creditors and without having to file a disclosure statement. Disclosure statements are typically required for a Chapter 11 filing, but no longer in this case. Subchapter V of Chapter 11 was then expanded by the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) and provides options for small business debtors considering Chapter 11 bankruptcy protection. Designed to alleviate costs and create greater efficiencies in the Chapter 11 process, the SBRA was modified by the CARES Act to raise the maximum qualifying debt level from approximately $2.7 million to $7.5 million, through March 27, 2021. This temporary modification expands the eligibility to file for Chapter 11, utilizing the SBRA, to thousands of additional small businesses during a time of unanticipated economic instability.
Chapter 13 bankruptcy is most often utilized by individuals who resolve their debts via an installment payment plan in exchange for the ability to safeguard their assets, including homes or other properties, from foreclosure or repossession. A Chapter 13 bankruptcy may be preferred over a Chapter 7, as Chapter 13 bankruptcy permits a debtor to submit a plan which safeguards assets and requests forgiveness of other additional debts, instead of undergoing total asset liquidation. Filing a Chapter 13 petition suspends current foreclosure proceedings and payment of other debts while the bankruptcy court considers the debtor’s proffered reorganization plan.
Before applying for any of these filings, certain qualifications must be met. Once a determination of eligibility is made, a debtor can employ certain exemptions to protect various forms of equity. How an individual or business chooses to handle financial hardships depends greatly on their specific circumstances, which vary from case to case.
If you are a business owner or individual and would like to discuss your options relating to bankruptcy eligibility, loan modifications or debt restructuring, please contact Paul M. Pochepan, Esq. or Diane R. Tiveron, Esq. of Tiveron Law Attorneys at Law at 716-636-7600.
DISCLAIMER: This article has been published as a service to the general public, and, as such, is intended for general purposes only. The information contained within this article should not be considered and/or construed as legal advice. Each reader is advised to consult legal counsel to determine how the contents of this article may apply to their particular facts and circumstances.
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