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The purpose of federal bankruptcy laws, also known as Title 11 of the United States Code or the “Bankruptcy Code,” is to offer a chance for financial reorganization or a fresh start for legitimate debtors who cannot meet their financial obligations. This goal is achieved through bankruptcy law, which provides debtors with a legal mechanism to: (1) eliminate, reduce, reorganize, and/or extend most of their debts; and (2) protect themselves from creditor harassment and actions during the bankruptcy process, subject to certain restrictions. In addition to helping the debtor, bankruptcy law also seeks to ensure fair treatment of creditors in the following ways: (A) protecting them from fraudulent actions; (B) ensuring equal treatment of creditors in similar situations; (C) requiring the debtor to disclose details about their assets, income, and debts to confirm eligibility for bankruptcy; and (D) giving creditors regular notice and an opportunity to participate in the process.
An individual (by themselves or as a married couple) or a business (a sole proprietorship, partnership, or corporation) may file for bankruptcy protection, with very few exceptions. Although most people who file for bankruptcy protection are “insolvent,” which is defined as having more liabilities than assets or being unable to pay their debts on time, being insolvent is not a prerequisite for filing for bankruptcy voluntarily.
When a bankruptcy case is initiated, an “automatic stay” is immediately enforced to protect the petitioner from creditors. In a Chapter 13 or Chapter 11 case, most debts can be resolved, reduced, or restructured through a plan. In a Chapter 7 case, most debts can be discharged, effectively eliminating them. Bankruptcy cases are overseen by a federal bankruptcy court specifically designated to handle such matters, providing a forum to resolve any disagreements or concerns. Once a case is filed, creditors must halt all collection actions and comply with the bankruptcy stay and discharge, which will also be reflected on the debtor’s credit report.
Common reasons for filing for bankruptcy include:
Bankruptcy can serve other purposes not listed here. However, given the complexity of bankruptcy law, individuals or businesses considering filing should thoroughly consult with a bankruptcy attorney to discuss their goals. A bankruptcy lawyer can assess whether the desired objectives can be achieved based on the specifics of each case.
If most of your debts are credit card or other unsecured debt, negotiating with your credit card companies, especially through a firm like ours that can file for bankruptcy, may help reduce the debt effectively. While payment plans don’t provide the same reductions as lump-sum agreements, both can lead to positive outcomes. Additionally, we can litigate with unsecured creditors, particularly in situations where there’s a dispute or when more time or leverage is needed to achieve a favorable resolution. Bankruptcy often provides more certainty and a quicker resolution when it comes to settling debt. However, if a client isn’t eligible for bankruptcy (due to income or asset restrictions in Chapter 7, or debt limits in Chapter 13, as detailed below), negotiated settlements or litigation may be a better option, particularly if the client’s debt issues are isolated to one or two creditors. Some clients may also prefer to avoid bankruptcy altogether, and in these cases, negotiation can provide sufficient relief without the need to file, although it may not be as effective as bankruptcy. We work to negotiate various debts, such as credit card, tax, mortgage, and other debts, on behalf of our clients.
If most of your debts are credit card or other unsecured debt, negotiating with your credit card companies, especially through a firm like ours that can file for bankruptcy, may help reduce the debt effectively. While payment plans don’t provide the same reductions as lump-sum agreements, both can lead to positive outcomes. Additionally, we can litigate with unsecured creditors, particularly in situations where there’s a dispute or when more time or leverage is needed to achieve a favorable resolution. Bankruptcy often provides more certainty and a quicker resolution when it comes to settling debt. However, if a client isn’t eligible for bankruptcy (due to income or asset restrictions in Chapter 7, or debt limits in Chapter 13, as detailed below), negotiated settlements or litigation may be a better option, particularly if the client’s debt issues are isolated to one or two creditors. Some clients may also prefer to avoid bankruptcy altogether, and in these cases, negotiation can provide sufficient relief without the need to file, although it may not be as effective as bankruptcy. We work to negotiate various debts, such as credit card, tax, mortgage, and other debts, on behalf of our clients.
Bankruptcy cases fall into three main categories: Chapter 7, Chapter 11, and Chapter 13. Chapter 7 is the most common form of liquidation bankruptcy. Chapter 11 is primarily used by businesses for reorganization. Chapter 13, also known as a “wage earner’s bankruptcy,” is typically used by individuals. These categories are named after the corresponding sections of the Bankruptcy Code and are designed to address different financial situations.
A Chapter 7 bankruptcy can be used to liquidate a business or to discharge most of an individual’s debts. Chapter 13 bankruptcy allows individuals or sole proprietors with a steady income to repay their debts over time. This option is often used by those who don’t qualify for Chapter 7 due to excess income or asset equity, or by individuals seeking to prevent foreclosure on their home or other property. A Chapter 11 case is used by businesses or individuals who want to reorganize their finances, allowing them to retain ownership, control, and operation of their assets while restructuring their debts.
The procedures, conditions, and rights associated with these various bankruptcy case types fluctuate significantly, and their applicability to a given situation might also differ substantially based on the specific facts and persons involved.
Chapter 7 is the most commonly filed bankruptcy case due to its ability to “discharge” or eliminate debt. However, because Chapter 7 has specific requirements to determine if a person can or should file under it, it’s not available to everyone. The primary qualification involves comparing the client’s income to the median income of a family of the same size in New York State, which is based on the number of household members or dependents. The purpose of means testing is to determine whether the client’s income exceeds the average for their household size.
Eligibility for filing in New York depends on the client’s necessary expenses, which are based on their actual, verifiable spending and limited by IRS guidelines. The test looks at the client’s income, allowable expenses, and essential costs for the six months leading up to the bankruptcy filing. For a client to qualify for Chapter 7, their budget must show a negative balance and disposable income under the means test. In other words, their income minus regular expenses (excluding debt payments) should result in a negative figure.
If a client doesn’t pass the Chapter 7 means test, they may still qualify for Chapter 13 bankruptcy, where they can pay off a portion of their debt through a five-year repayment plan. However, they wouldn’t be able to file for Chapter 7 at that point.
In addition to income limitations, Chapter 7 has unofficial restrictions based on the equity in a client’s assets. Even though exemptions and liens may protect certain assets, if the client has substantial unprotected equity in assets like a home, car, or expected money from an inheritance, lawsuit, or tax refund, those assets could be sold by the Chapter 7 trustee. Therefore, if a client has significant exposed equity in potential assets, they may want to consider other bankruptcy options.
Unlike Chapter 7, Chapters 13 and 11 do not have official income limits or unofficial asset/equity restrictions, making them more accessible for filers. Chapter 13 allows for a five-year repayment plan where individuals with positive discretionary income or equity in their assets can file for bankruptcy. During this period, the debt, or a portion of it, can be paid off without accruing additional interest or fees from creditors. However, Chapter 13 imposes a debt limit—$1,395,875 for secured debt and $465,275 for unsecured debt as of April 1, 2022. These limits are typically applicable to those involved in real estate investments, businesses, or those with substantial mortgages.
If a person’s debts exceed these Chapter 13 limits, they may file under Chapter 11, which is designed for cases involving larger debt loads and is often used by businesses or individuals with significant debt. Corporations can only file under Chapter 7 for liquidation or Chapter 11 for reorganization; they are not eligible for Chapter 13, which is available solely to individuals, even if their debt is relatively modest.
Chapter 11 is far less structured than Chapter 13 and can address various corporate reorganizations in a variety of ways. A more recent addition to Chapter 11, Subchapter V, was created to provide a reorganization option for small businesses. This provision allows small businesses to proceed with Chapter 11 cases in a more efficient, cost-effective, and timely manner compared to traditional Chapter 11 cases.
An adversary bankruptcy proceeding is a legal action initiated by a creditor, the debtor, or a bankruptcy trustee to resolve a critical issue that must be determined by the bankruptcy court. Creditors may raise objections regarding the dischargeability of debt, often citing allegations of fraud or misrepresentation by the debtor. The Bankruptcy Trustee may challenge the entire bankruptcy discharge, block a potentially fraudulent or preferential transfer, or seek the turnover of an asset.
An appeal of a decision that we believe may have been made
A bankruptcy appeal is the process of challenging a decision that we believe may have been made in error, by appealing from the U.S. Bankruptcy Court to the U.S. District Court.
Individuals and businesses considering bankruptcy often face significant financial challenges that are either already reflected on their credit reports or will soon appear. While filing for bankruptcy will impact a person’s credit score, it can also help address and potentially resolve some of the underlying financial issues. As a result, someone who files for bankruptcy may be in a better position to repay new creditors and may ultimately pose a lower credit risk than they did before filing.
Every financial action can affect your credit report. Many clients who reach out to us about bankruptcy already have multiple entries on their credit report indicating financial distress. Although filing for bankruptcy will highlight these issues, it also provides an opportunity to resolve the debt that caused these problems. Essentially, the individual is relieved from burdensome debt obligations, allowing them to focus on rebuilding their credit, which could take anywhere from six months to two years. While the bankruptcy filing will remain on the credit report for ten years, this is also the same time frame during which any court judgment would be recorded.
In contrast to judgments, which show that a debt obligation is still ongoing and that lenders may be hesitant to extend credit due to the risks, a bankruptcy filing indicates that the person has discharged their problematic debts and moved beyond their financial struggles. Therefore, if you have debts in collections or about to go into collections, filing for bankruptcy can help you rebuild your credit by eliminating the root causes of your financial problems and reorganizing or removing troublesome debt.
Those filing for bankruptcy may also receive guidance from a bankruptcy attorney on how to improve their credit score.
Individuals and businesses considering bankruptcy often face significant financial issues that are either already reflected on their credit reports or will soon appear. Although filing for bankruptcy will impact a person’s credit report, it can also help address and potentially resolve some of the underlying financial problems. As a result, a person who files for bankruptcy may be in a better position to repay new creditors and may eventually represent a lower credit risk than before filing.
Every financial decision can affect your credit report. Most clients who approach us about bankruptcy already have multiple entries on their credit report indicating financial struggles. While filing for bankruptcy will highlight these difficulties, it can also help by resolving the debt that caused them. Essentially, the individual is relieved from burdensome debt obligations, allowing them to focus on rebuilding their credit, which could take anywhere from six months to two years. Though the bankruptcy filing will remain on the credit report for ten years, this is the same duration that any court judgment would remain.
A bankruptcy filing differs from a judgment in that it shows you have already discharged troublesome debts, signaling that the period of financial hardship is over. On the other hand, a judgment shows that the debt obligation is still ongoing, and lenders may hesitate to offer new credit due to the continued financial risk. Therefore, if you have debts in collections or those about to enter collections, filing for bankruptcy can help you rebuild your credit by removing the root cause of your financial troubles and restructuring or eliminating problematic debt.
Those filing for bankruptcy may also receive advice from a bankruptcy attorney on how to improve their credit score.
Deciding whether to file for bankruptcy is a personal choice, but there are several indicators that may suggest it is a strong option. First, if your debts are overwhelming and clearly exceed your income, bankruptcy should definitely be considered. Second, if you are significantly behind on your debts and see no way to catch up, bankruptcy may be a viable solution. Third, if you are managing to stay current with your bills but struggling to balance high-priority payments like mortgage and car loans with lower-priority debts like credit cards, bankruptcy should be considered to avoid letting those lower-priority debts interfere with more important obligations. Finally, if you feel that your payments are only buying time without addressing the root of the problem and that those debts will eventually worsen, bankruptcy should be seriously considered.
The best way to evaluate your options is by scheduling a free consultation. Our office offers free consultations by phone or in person at our Melville law office, where we can review your situation and determine whether filing for bankruptcy is the best path forward.
The Coronavirus Aid, Relief, and Economic Security (“CARES”) Act, passed by the U.S. Congress during the early stages of the 2020 COVID-19 pandemic and signed into law on March 27, 2020, provided not only emergency assistance to individuals and businesses impacted by the pandemic but also brought significant changes to bankruptcy laws, including:
CHAPTER 11 and COVID-19 – The CARES Act included amendments to the U.S. Bankruptcy Code to help address challenges brought on by the pandemic. One key change was the temporary expansion of Subchapter 5 of Chapter 11, which was part of the Small Business Reorganization Act of 2019. The debt cap for Subchapter 5 was increased to $7.5 million, making this provision more applicable to small businesses seeking reorganization. This change aimed to make the process faster, more efficient, and more affordable. A notable innovation in Subchapter 5 was the appointment of a businessperson, rather than a trustee from the U.S. Trustee’s Office, to oversee the case. This shift in oversight could bring a more business-focused perspective to the reorganization, prioritizing the company’s financial health rather than strict compliance with administrative requirements, which typically characterizes traditional Chapter 11 cases. Additionally, Subchapter 5 streamlined the Chapter 11 plan approval process by eliminating the need for a disclosure statement and simplifying the plan and approval procedures.
CHAPTER 7 and COVID-19 – The CARES Act aimed to make it easier to access Chapter 7 bankruptcy relief by excluding the additional federal unemployment assistance (which was $600 per week initially and later reduced to $300 per week) from the income considered when applying the “means test” for Chapter 7 eligibility.
CHAPTER 13 and COVID-19 – The CARES Act also allowed for Chapter 13 plans to be extended by up to two years due to COVID-19-related financial hardships. This extension allows for a Chapter 13 plan to be extended from the typical five years (60 months) to a maximum of seven years (84 months). This extension gives debtors greater flexibility by lowering monthly payments and providing additional relief during periods of increased financial strain.
When it comes to bankruptcy, we cover everything from A to Z. With nearly 30 years of experience, we have the knowledge, resources, and expertise to handle all aspects of bankruptcy law. Our practice spans all chapters of the Bankruptcy Code – Chapters 7, 11, 13, and the new Subchapter V of Chapter 11 – and we also specialize in complex, litigated bankruptcy cases, including defending and prosecuting adversary proceedings, filing and opposing contested motions, and pursuing bankruptcy appeals for unfair or erroneous decisions.
We offer efficient and affordable services for more straightforward bankruptcy matters, and we also handle intricate and unique cases that require creative problem-solving, strategic planning, and customized approaches – all while remaining affordable.
At the same time, we pride ourselves on being a friendly, quirky, and brilliant team who loves what we do. We enjoy working with our clients and take great pride in treating every case as if it were our own, approaching each task with the care and attention it deserves. Despite the debt challenges life may have thrown your way, our law office is here to tackle them with you, improve your situation, and turn the process into an enjoyable and successful experience for all involved.
Our consultations come at no cost, but the legal advice we offer could be priceless.
Please call us at (631) 570-8742, or e-mail us at weiss@ny-bankruptcy.com for a free consultation at our Melville law office to discuss legal options, including Bankruptcy Solutions, in greater detail.
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