Filing For Bankruptcy

Individuals can file bankruptcy in Chapter 7, Chapter 13, or Chapter 11 or Sub-V Chapter 11. Only family farmers can file bankruptcy in Chapter 12. But individuals can only file bankruptcy in those Chapters of bankruptcy if they meet the eligibility requirements for the particular Chapter of bankruptcy, here discussed.

Corporations, limited liability companies (“LLC”s), and partnerships can file Chapter 7 or Chapter 11 bankruptcy, and, if they meet the eligibility requirements, can file bankruptcy in Sub-V Chapter 11, but are not eligible to file Chapter 13 (the individual wage earner repayment plan Chapter of bankruptcy), and usually cannot file Chapter 12 (family farmer bankruptcy). Corporations, LLCs and partnerships usually file Chapter 11 bankruptcy, because they can only seek a discharge of debt in Chapter 11, and are not eligible to receive any discharge of debt if they file Chapter 7 bankruptcy. Because of they cannot seek or receive a discharge in Chapter 7, Chapter 7 bankruptcy is rarely a useful choice for corporations, LLCs and partnerships.

Our law firm, The Bankruptcy Law Firm, PC can be hired, by a written contract signed by Law Firm and client, with payment of the attorneys fee specified in the contract, to represent clients filing bankruptcy in any of these Chapters, but finds that Chapter 7 or Chapter 13 are usually most suitable, and most economical in attorneys fees, for individuals.

Chapter 7 is by far the least expensive of all kinds of bankruptcy, in attorneys fees. Most attorneys who represent Chapter 7 debtors in filing bankruptcy, including our law firm, do the basic chapter 7 bankruptcy representation for a flat fee that is stated in the representation contract. Chapter 13 (the individual repayment plan bankruptcy Chapter of bankruptcy) is more expensive in attorneys fees than Chapter 7, but is much less expensive in attorneys fees than Chapter 11.

The biggest reason individuals file bankruptcy is to seek a discharge of credit card debt, medical debt, unsecured loans, personal guarantees by the individual of debts of a corporation of limited liability company, and lawsuits/judgments for breach of contract or negligence. “Discharge” means to make a debt permanently unenforceable as a personal liability of the bankruptcy debtor who receives the discharge.

Chapter 7 bankruptcy is referred to as the “liquidation chapter”, because a Chapter 7 Trustee is appointed in every Chapter 7 bankruptcy case, and takes and sells everything the Chapter 7 debtor owns, except for those things the Chapter 7 debtor can exempt. Many Chapter 7 debtors can exempt everything they own, so they can seek a discharge in Chapter 7 without losing any of their assets.

For the majority of individuals, Chapter 7 bankruptcy is the most favorable kind (Chapter) to file bankruptcy in, because Chapter 7 is the only Chapter (kind) of bankruptcy where the debtor does not have to do a repayment plan for a period of years (usually 5 years, but sometimes 3 years), to try to repay credit card debt, medical debt, and other unsecured debt. In Chapter 7, a debtor can seek to discharge credit card debt, medical debt, and certain other kinds of general unsecured debts. However, only consumer debtors who can pass the "means test" (form 22 of bankruptcy official forms) are allowed to file Chapter 7 bankruptcy, unless more than 50% of their total debts are business debts.

However, a Chapter 7 bankruptcy discharge does NOT eliminate liens, such as car loans secured by a lien on the debtor’s car, or home loans secured by a Deed of Trust on the debtor’s house.

There is no right to dismiss a Chapter 7 or a Chapter 11 case. A debtor in Chapter 13 generally does have a right to dismiss a Chapter 13 case, if the bankruptcy case was originally filed as a Chapter 13 case.

Some individuals are not eligible for Chapter 7 bankruptcy, because they have too high an income to pass the Chapter 7 “means test”, and because more than 50% of their debts (by dollar amount) are consumer (non-business) debts. Individuals who cannot pass the Chapter 7 “means test”, but whose debts are more than 50% non-consumer debts (by dollar amount) are eligible to file Chapter 7 bankruptcy.

Individuals who are not eligible for Chapter 7, are often eligible to file Chapter 13 bankruptcy, if they have a source of regular income and are within the debt limits for Chapter 13. Usually Chapter 13 is a much better choice than Chapter 11 for individuals.

There are no debt limits for Chapter 7. But there are debt limits for Chapter 13, which is that to be eligible for Chapter 13, the person who wants to file Chapter 13 must have less than $2,750,000 of noncontingent, liquidated debts. 11 USC §109(e). If an individual is over the debt limit for Chapter 13, the individual is NOT eligible to file Chapter 13. Chapter 11, discussed below, has no debt limits for regular Chapter 11. Sub-V-Chapter 11 (the cheaper, easier to confirm a plan, better for debtors “stripped down” version of Chapter 11, has a debt limit of noncontingent, liquidated, secured and unsecured debts, added together cannot be over $3,424,000, plus to be eligible for Sub-V-Chapter 11, the debtor must be “engaged in commercial or business activities”, and cannot be a “single asset” real estate owner. 11 USC §1182.

In a Chapter 13 bankruptcy, the debtor must propose, and get the Bankruptcy Judge to “confirm” (means approve) a Chapter 13 repayment plan, which is required to be 5 years (60 months) long, but for a below median income debtor, can be only 3 years long. Generally speaking for a proposed Chapter 13 plan to be confirmable, the plan must provide that the Chapter 13 bankruptcy debtor will pay that debtor’s “disposable monthly income” into the Chapter 13 plan each month, for the life of the plan. With a few tiny exceptions, only individuals can file Chapter 13.

Though a payment plan is required, Chapter 13 can accomplish things that Chapter 7 cannot accomplish. Most importantly, a Chapter 13 plan can allow the Chapter 13 debtor to pay off an arrearage on the debtor's residence or other real property over a 60 month repayment plan, thereby saving the residence or other real property from being sold in nonjudicial foreclosure. But to accomplish that through a Chapter 13 plan, the debtor must have sufficient “disposable monthly income” to pay off the arrearage owed on the property, secured by a deed of trust on the property, over a Chapter 13 plan of a maximum of 60 months. Not everyone has enough “disposable monthly income” to do that. But seeking a discharge of credit card, and other kinds of dischargeable debt, through a Chapter 13 plan, while paying a very small percent of what is owed on the unsecured debt, can free up money to use to pay off the arrearage on the real property, over a 60 months plan.

Individuals, corporations, and limited liability companies can, and usually do, file bankruptcy in Chapter 11. Chapter 11 is very expensive in attorneys fees. The Chapter 11 debtor must propose a Chapter 11 repayment plan, and must get the Bankruptcy Judge to confirm (approve) the proposed Chapter 11 plan so it goes into effect. While a Chapter 13 plan cannot be longer than 5 years (60 months) except in rare pandemic related circumstances, a Chapter 11 plan can be longer than 5 years, to give the debtor more time to pay.

"Sub-V" Chapter 11 — added to the Bankruptcy Code in 2019, is the (supposedly) faster, simpler, cheaper and more likely to confirm a Plan Chapter 11, than a regular Chapter 11 bankruptcy would be.

Sub-V has many important benefits for individuals, corporations, LLCs and partnerships which are eligible to file Sub-V Chapter 11 bankruptcy, as compared with those individuals, corporations, LLCs and partnerships filing regular Chapter 11 bankruptcy cases. Differences between Sub-V Chapter 11, when compared to regular Chapter 11, include:

1. Per 11 USC §1181(a) and §1191(b) of Sub-V Chapter 11, the "absolute priority rule" (11 USC §1129(a)(7))--which applies in regular Chapter 11 cases, does NOT apply in Sub-V cases. The result is that in a Sub-V bankruptcy, the bankruptcy debtor can keep the debtor’s business, debtor’s real property, all debtor’s additional assets, so long as the Sub-V debtor proposes, and convinces the bankruptcy judge to confirm, a Sub-V plan. ("Confirm" convince the Bankruptcy Court approve the debtor’s proposed Sub-V plan, so the Sub-V plan goes into effect, binding the Sub-V debtor and the creditors.
2. Pursuant to Sub-V section 11 USC 1191(b), a Sub-V debtor can confirm a Sub-V plan, even if NO impaired class of claims votes to accept the Sub-V plan. This is very important, because in a regular Chapter 11 case, if there is an impaired class of claims, the debtor cannot confirm a plan unless at least one impaired class of claims votes to accept the Plan. It is NOT unusual that NO impaired class of creditors votes to accept the proposed Plan, in a regular Chapter 11 case, which prohibits the Bankruptcy Court from confirming (approving) the Chapter 11 plan in a regular Chapter 11 case. Where a debtor/debtor’s attorney think there is a RISK (maybe almost a certainty) that NO impaired class of claims will vote to accept the debtor’s Chapter 11 plan, if the debtor files a regular Chapter 11 case, then filing a Sub-V Chapter 11—if the debtor is eligible to file Sub-V Chapter 11—may be the debtor’s only hope of confirming a Chapter 11 (Sub-V) plan.
3. Only the Sub-V debtor can file a proposed Sub-V plan, whereas in regular Chapter 11, under certain defined circumstances, a creditor, a trustee, or even the Office of US Trustee, can file a proposed Chapter 11 plan, and if the party that files such a proposed Chapter 11 plan can get it confirmed (approved by the Bankruptcy Court) it will bind the debtor and all creditors.
4. Usually, no disclosure statement to plan is required, which saves time and money, unless the Court orders a disclosure statement, which is rare. However, the Sub-V plan is required to give some information regarding debtor’s profitability, etc.
5. Though the Sub-V debtor must file a proposed Sub-V plan within 90 days after the Sub-V debtor files the Sub-V bankruptcy case, there is no deadline in Sub-V by which the Sub-V debtor must get the Sub-V debtor’s proposed Sub-V plan confirmed (approved) by the Bankruptcy Court. Plus, once a Sub-V plan is filed, it can be modified by the Sub-V debtor.
6. There is a new party in Sub-V cases, the Sub-V Trustee, which is appointed by the Office of US Trustee. See 11 USC §1183(b)(7) of Sub-V. The job function of the Sub-V Trustee is to help the Sub-V debtor try to negotiate a Sub-V plan that the Sub-V’s creditors will vote to accept. Sub-V Trustees talk to the Sub-V debtor/Sub-V debtor’s attorney about plan terms, and then negotiate with the Sub-V debtor’s creditors, to try to convince the Sub-V debtor’s creditors to accept the terms the Sub-V debtor has or will propose.
7. Unlike in regular Chapter 11 cases, where a Chapter 11 trustee, if appointed by the Bankruptcy Court, displaces the Chapter 11 debtor from being a "debtor in possession", the Sub-V Trustee does NOT displace the Sub-V debtor from being a "debtor in possession. Because of this, the Sub-V debtor remains in charge of the Sub-V debtor’s business, real property, and other assets, except in the (supposed to be rare) situation where the Bankruptcy Court orders the Sub-V trustee to take over running the Sub-V debtor’s business, real property, and other assets. That is only supposed to happen in a Sub-V case if the Sub-V debtor demonstrates that the Sub-V debtor is not trustworthy enough to be left running all the assets. However, there is a downside to a Sub-V Trustee, which is that the Sub-V debtor will have to pay for the work done by the Sub-V Trustee, through the Sub-V debtor’s Sub-V plan assuming a Sub-V plan is confirmed. The more active the Sub-V Trustee is, the higher the fees of the Sub-V Trustee will be.
8. If the Sub-V Trustee is successful in convincing the creditors to vote to accept the Sub-V debtor’s Sub-V plan, then the plan is only 3 years long and the Sub-V debtor makes the plan payments. But if the Sub-V Trustee is NOT successful in convincing the creditors to vote to accept the Sub-V debtor’s Sub-V plan, the Sub-V plan can still be confirmed (approved) by the Bankruptcy Judge, so that it will go into effect, even though NO CLASS of creditors has voted to accept the Sub-V Plan. However, if the creditors do NOT vote to accept the Sub-V plan, then the Sub-V plan is required to be 5 years long, NOT just 3 years long, and it is the Sub-V Trustee, not the Sub-V debtor, which makes the Plan payments, pursuant to the confirmed plan.
9. One thing that is helpful to Sub-V debtors is that administrative expenses (attorneys fees owed debtor’s attorney, fees owed the Sub-V Trustee) can be paid over the life of the Sub-V plan. That is different from regular Chapter 11, where all the administrative expenses must be paid in full, on the effective date of the regular Chapter 11 plan, unless an administrative claimant agrees to be paid later than the effective date of the regular Chapter 11 plan, and it can be hard to impossible to get administrative claimants to agree to that.
10. Also, there is no creditors committee in a Sub-V case, unless the court orders one, which is rare in Sub-V, but common in regular Chapter 11. No creditors committee saves money for the debtor, because it is the debtor that is required to pay the attorneys fees of the attorney for the attorney for the creditors committee, which must be paid through the Chapter 11 plan.
11. The Sub-V debtor does NOT have to pay quarterly fees to the Office of US Trustee. See 28 USC §1903(a)(6)(A). This is very important, because, depending on the case, quarterly fees can be tens of thousands of dollars or more.
12. The Sub-V debtor does have to file a Monthly Operating Report ("MORs"), each month, in the Sub-V bankruptcy case, just as debtors in regular Chapter 11 case are required to file MORs. In addition, as in regular Chapter 11, the Sub-V debtor must complete and submit to the Office of US Trustee a "7 day package" of multiple required items (like proof of insurance) within 7 days after the Sub-V case is filed.
    
    Note: This can be a bad feature of Sub-V Chapter 1: A Sub-V Trustee is appointed in every Sub-V Chapter 11 case, and is not controlled by the debtor, but must be paid on an hourly basis by the debtor. This can result in increasing the total cost of Sub-V Chapter 11 to where it is not feasible. In contrast, in a regular (non-Sub-V) Chapter 11 case, the debtor is a debtor-in-possession, with no Trustee, though a Trustee can be appointed by the Court under certain circumstances.