Chapter 7 bankruptcy is the most common form of bankruptcy. Commonly referred to as “liquidation” bankruptcy, under Chapter 7 bankruptcy, the debtor is not required to file a repayment plan. Rather, the bankruptcy trustee is responsible for gathering and selling the debtor’s non-exempt assets. The trustee then utilizes these proceeds to pay creditors per the provisions of the Bankruptcy Code. Conversely, one of the most significant benefits of Chapter 7 bankruptcy is that the Bankruptcy Code will permit the debtor to retain certain exempt property.  Additionally, part of the value of a debtor’s property may be subject to a secured creditor’s lien, such as a car loan or home mortgage. Secured debts and exemptions help reduce the potential value to a trustee in a hypothetical liquidation. However, as previously explained, the trustee will be responsible for liquidating any unencumbered non-exempt assets to repay the debtor’s creditor. The collection of assets, sale of non-exempt belongings, and redistribution of funds are known as the asset liquidation process.

Who Is Eligible for Chapter 7 Bankruptcy?

The first criterion to qualify for relief under Chapter 7 bankruptcy is the debtor must be an individual, partnership, corporation, or other business entity. The first determination is whether your income is higher or lower than the median income for a household of your size in New York. If your income is lower than the median, then you will generally qualify for Chapter 7 bankruptcy. From there, the bankruptcy “means test” is used to determine whether a debtor’s income is such that the debtor qualifies for Chapter 7 bankruptcy. Typically, the means test will deduct specific monthly expenses from a debtor’s current monthly income. This amount is a debtor’s monthly disposable income. The lower a debtor’s monthly disposable income, the more likely they will be eligible to file for Chapter 7 bankruptcy.

Chapter 11 bankruptcy is commonly referred to as “reorganization” or “restructuring.”  As its name suggests, entities filing under a Chapter 11 bankruptcy are attempting to reorganize or restructure their business debts, assets, and financial affairs. One of the most complex forms of bankruptcy, Chapter 11, is filed by corporations, partnerships, limited liability companies, and other business entities.  While business entities comprise the overwhelming majority of Chapter 11 filing, individuals are not barred from filing for Chapter 11 and may choose to seek relief under Chapter 11 if other options are not available for them under the bankruptcy code. Businesses will typically file for Chapter 11 to keep their businesses afloat while restructuring their debt to creditors. One of the most notable advantages to Chapter 11 bankruptcy is that after the bankruptcy process is complete, entities effectively have a clean slate, so long as they satisfy their commitments under the plan of reorganization.

Who Is Eligible for Chapter 11 Bankruptcy?

There is no “means test” that a debtor must meet to be considered eligible for Chapter 11 bankruptcy. However, an individual is ineligible for Chapter 11 bankruptcy if, during the preceding 180 days, a prior bankruptcy petition was dismissed because of the following:

• The debtor’s “willful failure” to appear in court

• The debtor did not comply with court orders

• Creditors sought relief from the court to recover property upon which they hold liens.

However, there are exceptions to these general guidelines. Petitioning for Chapter 11 is complicated, and the process and qualifications vary on a case-by-case basis. Consulting with an expert bankruptcy will be vital to determining whether you or your business are eligible to petition for Chapter 11 bankruptcy.

Chapter 13 bankruptcy, often referred to as a “wage earner’s plan,” is another type of “restructuring” bankruptcy. However, unlike a Chapter 7 bankruptcy, a Chapter 13 bankruptcy requires filing a repayment plan. The repayment plan option under Chapter 7 gives individuals with a “regular” income the opportunity to determine and control how they will repay their debts. Under a Chapter 13 repayment plan, the debtor is required to contribute payment installments to creditors over a three to five-year time period. One substantial advantage of a Chapter 13 filing is that the law prohibits creditors from any debt collection efforts during the plan period. This acts to stop creditor harassment and provides debtors relief as they are able to focus on their repayment plan.   Additionally, individuals can cease foreclosure proceedings by filing for Chapter 13, allowing them to keep their homes.

Who Is Eligible for Chapter 13 Bankruptcy?

Any individual or married couple, even if they are self-employed or operate a business, can potentially qualify for Chapter 13 bankruptcy.  However, their unsecured debts must not exceed $419,275, and their secured debts must not surpass $1,257,850. You will also need a sufficient amount of disposable income to meet your repayment obligations. For debtors whose income exceeds the Chapter 7 “means test,” Chapter 13 bankruptcy may be the only option.  Contact a Long Island bankruptcy lawyer to determine which type of bankruptcy is most appropriate for you.