Is Bankruptcy the Right Solution?
If so, which One is Right for You?
THAV GROSS, Law and Reality’s sponsor, is one of the largest filers of Chapter 13 and Chapter 7 consumer bankruptcies in the State of Michigan. Through a Chapter 13 proceeding, individuals can restructure their debt by paying unsecured creditors as little as 0% of the debt owed, as well as reducing secured debt payments, such as car or furniture loans. This process will also stop foreclosure of homes, as well as repossession of vehicles and garnishment of wages. In addition, through a Chapter 7 proceeding, debt can be eliminated in those cases where consumers have insufficient funds (such as credit cards, hospitals, etc.) after payment of monthly necessities (i.e., rent, groceries, utilities, etc.).
Thav Gross is also one of the premier law firms handling then needs of small businesses facing financial crisis. Chapter 11 allows a means to reorganize small to medium sized businesses. More importantly, there is often a better alternative for a business person to reorganize or “re- invent” though mechanisms outside of bankruptcy. When businesses falter, we employ our extensive experience in all aspects of a corporate distress, including tax debt resolution, drafting and confirming plans of reorganization, contesting valuations, asset acquisition and sales, as well as repurchases to reach an optimal solution to the problem.
About Chapter 7
An individual files his or her case in the federal district where he or she has resided the most during the 180 days immediately preceding the filing of the case. If you have previously obtained a Chapter 7 discharge, you must wait eight years after the last discharge to file another. The prime goal in filing a Chapter 7 case is to obtain a fresh start. In this context, “the debtor is exchanging his or her nonexempt property for the forgiveness of dischargeable debts.” This quoted sentence speaks to two key issues. You are only able to retain “exempt property” which means the non-exempt property will be subject to sale by trustee in order to liquidate the asset and provide funds to distribute to the creditors. Secondly, the discharge does not apply to “non-dischargeable debts.”
The exempt property is the property which the individual is allowed to retain when filing a Chapter 7 case. You are permitted to elect either the Federal Exemptions or the state law exemptions for the state you are filing in. This can be a sensitive issue that calls for the expertise of the bankruptcy attorney to address. The goal is to select the exemption scheme that will protect your most valued assets. This is where your attorney is key. Bankruptcy requires extensive and careful planning.
About Chapter 13
Chapter 13, often called the wage-earner’s plan or debt adjustment plan, is a trustee supervised reorganization of an individual’s debts. In a situation where an individual is not able to obtain the benefit of a Chapter 7 case, we evaluate whether they can derive a benefit from Chapter 13. There are, however, several circumstances, where a Chapter 13 case, on its own, is a valuable tool in Financial Crisis Management. There are primarily four sets of circumstances where Chapter 13 can provide a positive outcome that is not available through a Chapter 7 filing.
The first and most compelling reason to file a Chapter 13 case is that it is the only way a homeowner can stop a mortgage lender from pursuing foreclosure of the house and allow for the right to cure the arrearage in payments over the course of the plan. Of course, a loan modification could achieve the same result, but this can only occur on a consensual basis with the lender – which, unfortunately, is not always available. Another key benefit to a Chapter 13 case is that if you have a second, third or other junior mortgage on your residence and there is no equity attaching to the security because the fair market value of the home is less than the first mortgage, then these junior mortgages can be stripped of all secured value and treated as an unsecured claim. Similarly, Chapter 13 allows you to strip the lien of first and all junior mortgage lenders on real estate that is not your personal residence. To the extent the mortgage balances exceed the market value of the real estate, such amounts can be treated as unsecured claims. With more than six million homes still underwater, Chapter 13 remains a high value tool in solving the problem of underwater property.
Chapter 13 allows you to save a vehicle from repossession or if the vehicle has been repossessed, you can compel its return. Chapter 13 is also a valuable tool in situations where you own real or personal property with significant equity and wish to retain these assets. Keep in mind, under Chapter 7; you only are able to retain the exempt assets. Beyond the exemptions, the remaining assets are property of the bankruptcy estate and it is the Chapter 7 trustee’s duty to sell these assets for the benefit of the creditors. Chapter 13, on the other hand, allows you to retain the assets. The tradeoff is that the value of the equity in these assets is taken into account in the determination of the amount that is to be paid to your creditors over the life of the plan.
About Chapter 11
Chapter 11, which is the business reorganization provision of the Bankruptcy Code is also available for individuals. The process is complex and costly. Chapter 11 is nonetheless a tool used in Financial Crisis Management. For individuals, we consider it a tool of last resort due to its cost. At the same time, if you’re financial situation is such that you need the protection from creditors available through the bankruptcy process but you cannot pass the means test due as a result of your income being high and you fail to meet the debt qualification limits of Chapter 13, then Chapter 11 must be considered as a viable alternative. More often than not, for individuals and business we are able to adopt a more effective strategy outside of Chapter 11. It remains, however, a tool to be used in specific situations.