Sometimes when people come into our Waldorf or Lexington Park office they know exactly what type of bankruptcy they want to file. Other times a person just comes in to find out what options they may have. Even the person who thinks they know what they want to do is sometimes surprised that another type of bankruptcy is there best option. During your initial consultation we may even find that deciding what is the best bankruptcy option is a tough decision. While you can’t just read an article and figure out what type of bankruptcy you should file, having a basic understanding of the different types of bankruptcy is still a necessary first step in the decision making process. To help you get a better understanding of the different types of bankruptcy this article will give you an overview of some of the different Chapters of the Bankruptcy Code.
The most likely options for someone filing for bankruptcy are Chapter7 or Chapter 13. Usually when someone says they want to file for bankruptcy they are thinking of Chapter 7. You can think of this as a straight bankruptcy. In Chapter 7 Liquidation Bankruptcy you are typically asking that you debts get wiped out without paying anything back. You can think of Chapter 13 as a payment plan bankruptcy. In a Chapter 13 Reorganization Bankruptcy you are paying back some or all of your debts back over a 3 to 5 year period.
To qualify to file for a Chapter 7 you need to jump through some hoops. One of goals of the Bankruptcy Reform Act of 2005 was to push people into at least paying back some of their debts in Chapter 13. First you need to show that your household income is below the medium income for Maryland and you need to pass a means test. You also need to be able to show that you income is less or not much more than your basic living expenses.
Once you jump through these hoops you next need to see what assets you are aloud to keep when you file for a Chapter 7. One of the reasons a Chapter 7 is referred to as a Liquidation Bankruptcy is because if you have an asset that isn’t protected by an Exemption the Trustee will take that asset and sell it to payoff some of your debts. If you have lived in Maryland for 2 years what you can keep or Exempt is set forth in Maryland Law. If you have lived in Maryland less than 2 years what you can Exempt may be controlled by the laws of the State where you used to live. Exemptions can tell you something about a State. In Maine there is an exemption for firewood and heating fuel. In Oklahoma you can exempt a 2 bridles, 2 saddles, 2 horses and 100 chickens.
Maryland’s exemption aren’t so interesting. I suppose when lawyers from other States look at our exemptions they think that all we care about is money. Grossly oversimplifying things Maryland’s exemptions let you protect about $12,000 of assets. This is broken down into categories. $1,000 is for clothing, household goods and furnishings, $5,000 is for real property and personal property and $6,000 is for property of any kind. Maryland also has a Homestead Exemption that lets you protect around $23,0000 in equity in your principal residence. (this number is adjust each year) Maryland also lets you keep most types of retirement accounts.
There are other exemptions as well, but these are the most commons ones people use. This may not sound like much but the dollar amounts may go father than you think. For instance with you car you are typically going to use the private party value and subtract out what you owe. So you really are looking at what an asset could sell for, not what you paid for it.
To qualify for a Chapter 13 Reorganization bankruptcy you need to have income and for the year 2017 you need to show that you unsecured debts are less than $394,725 and your secured debts must be a little less than $1,184,200. (These amounts are revised each year in April) In a Chapter 13 you need to pay back at least some of your debts back over a 3 to 5 year period.
When you file a Chapter 13 you propose a payment plan. You start paying this amount to a Trustee the month after you file. The payment due date is the day of the month you filed your case. The amount you will have to payback is determined by a number of tests. The first is your disposable income. This is the money you have left over, as a household, after you have paid your what the bankruptcy code considers reasonable expenses. There are situations where you may be required to pay more than this. Fore instance, if you are filing a Chapter 13 to save your house when you are behind on your payments the payment plan needs to high enough to pay the arrears in full and at least some of what you owe your unsecured creditors. Your plan needs to also pass the Chapter 7 liquidation test. Remember those Chapter 7 Exemptions? If you have assets that wouldn’t be protected in a Chapter 7 your Chapter 13 plan must at least pay back what the unsecured creditors would have gotten in that Chapter 7.
The Other Chapters
While these are the most typical types of Bankruptcy below we will also touch on Chapters 9, 11, 12 and 15. Rather than go in numerical order we will cover these from the most common to the least common. These Chapters are mainly for businesses or special situations.
When I talk about these options sometimes I will asked about some other Chapter of the bankruptcy code. Most typically this question is about a Chapter 11. Chapter 11 is a much more complicated and expensive type of Reorganization Bankruptcy. It is primarily geared towards large corporations or businesses. Next time you hear or see a about some retail chain filing for bankruptcy you most likely will notice that it is a Chapter 11 that they filed. But remember the Chapter 13 secured and unsecured debt limits? If you have to do a Reorganization Bankruptcy and are over those limits you will have to file a Chapter 11.
Chapter 12 is a reorganization bankruptcy for Family Farmers and Fisherman. You would think that this might be a fairly common type of filing in Southern Maryland, but it really isn’t. Basically a Chapter 12 is just a Chapter 13 with higher unsecured and secured debt limits. The idea is that let these type of businesses avoid the expense and hassle of a Chapter 11 by increasing the debt limit to over 4 million dollars. Since the farms in Southern Maryland aren’t that big and the fisherman don’t have huge boats they may still be able to just do a Chapter 13 and not need to file a Chapter 12 to take advantage of the higher debt limit.
The other type of Bankruptcy you may hear about in the news is Chapter 9. This type of bankruptcy is for Municipalities. Probably the one most people remember is Detroit’s. When you hear Municipality you probably think of a city. But the way the Bankruptcy Code defines this term includes Counties, School Districts and other political subdivisions of a State. Because of this broad definition this type of bankruptcy is occurs more often than you might think.
The least common type of Bankruptcy is a Chapter 15 Cross Border case. This type of case is typically used to manage the proceedings necessary for a company that has filed for bankruptcy in another Country but has assets in the United States.