Chapter 1: Small Business Repayment Plan
Customarily reserved for individuals, Chapter 13 can be used for small business bankruptcy by sole proprietorships because the sole proprietor and the individual are indistinguishable in the eyes of the law, they exist as one.
The small business that wants to reorganize rather than liquidate files Chapter 13, including a repayment plan that details how debts will be repaid.
The amount that must be repaid hinges on how much you earn, how much is owed, and the value of the property owned.
Why not file Chapter 7 liquidation bankruptcy and be done with it? Chapter 13 protects personal assets, such as a home, which would be exposed to seizure if a sole proprietor filed Chapter 7.
What Happens To Your Business
If youre self-employed, your business will be closed. Any business assets will be claimed by the trustee.
Your employees may make a claim for unpaid wages and holiday pay, payment in place of notice, and redundancy. Theyll make this claim to the National Insurance Fund, or the money may be claimed in the bankruptcy process.
You can start trading again, but youll have to follow certain rules.
What Happens During Bankruptcy
Curious about what happens during bankruptcy? As you consider the different options for getting out of debt, keep in mind the specific requirements established by law for each relief option.
Some debt relief programs have few requirements and do not require much extra effort on your part. Others, however, have a process that is more involved. Personal bankruptcy requires more from the debtor than just about any other debt relief option in Canada. Here are the duties required of you in bankruptcy:
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What Happens To Your Motor Vehicle
Your motor vehicle will be sold to pay for your bankruptcy debts, unless you need it:
- for your work or vocation
- to meet basic domestic needs where alternative transport is not practical
If the official receiver agrees you need the vehicle, it will be classed as exempt and not included in your bankruptcy. This does not apply if you own your vehicle through an ongoing hire purchase agreement .
If you are allowed to keep the vehicle you remain responsible for road tax, MOT and insurance.
If your vehicle is exempt but valuable it can be replaced with a cheaper alternative. The official receiver will use the money from the sale to either pay for the new vehicle directly or give you the money to buy one. You must provide proof of purchase for your new vehicle within 1 month. The guide price for a replacement is £1,000.
Stop the sale of your vehicle
If your vehicle is not exempt you may be able to keep it if a third party can pay to transfer it to them for you and you provide a:
- current insurance certificate
- vehicle registration document
- a valid MOT
The price paid will be the market value of the vehicle but must at least cover the agents costs for the sale of the vehicle.
If you dont want to keep the vehicle the official receiver will dispose of it.
Vehicles under finance agreements
A finance agreement can be a:
- hire purchase
- conditional sale
- leasing agreement
If the trustee decides they wont be claiming the vehicle they will give notice to you and the finance company.
Chapter 1: Adjustment Of Debts For Individuals With Regular Income
Chapter 13 bankruptcy is a reorganization bankruptcy typically reserved for individuals. It can be used for sole proprietorships since sole proprietorships are indistinguishable from their owners. Chapter 13 is used for small businesses when a reorganization is the goal instead of liquidation. You file a repayment plan with the bankruptcy court detailing how you are going to repay your debts. Chapter 13 and Chapter 7 bankruptcies are very different for businesses.
Chapter 13 allows the proprietorship to stay in business and repay its debts and Chapter 7 does not.
The amount you must repay depends on how much you earn, how much you owe, and how much property you own. If your personal assets are involved with your business assets, as they are if you own a sole proprietorship, you can avoid problems such as losing your house if you file Chapter 13 instead of Chapter 7.
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Employed Homeowners Facing Mortgage Delinquency Or Foreclosure Chapter 13
For homeowners who have fallen behind on mortgage payments, Chapter 13 offers a way to catch up or “cure” past due mortgage payments while simultaneously eliminating some portion of dischargeable debt. Filers can save the home from foreclosure and get rid of a lot of credit card debt, medical debt, and possibly even second and third mortgages or HELOCs. Chapter 7 bankruptcy does not provide a way for homeowners to make up mortgage arrears, so it’s not a good choice for delinquent homeowners who want to keep a home.
What Happens To Your Assets After Discharge
Assets that are part of the bankruptcy stay under the trustees control when your bankruptcy ends. It can take time for all assets to be dealt with.
You must keep making any payments agreed under an IPA or IPO.
Your family home
If your family home has not been dealt with 3 years after the bankruptcy order, the interest may be given back to you.
If the interest in your family home is returned to you, the Land Registry will be told that the property is no longer part of your bankruptcy estate. The trustee will send notice to the Land Registry and the restrictions will be removed.
Your business
The restrictions on your business end when bankruptcy ends, unless the official receiver feels youve been dishonest. They can then apply to extend the restrictions
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Filing For Bankruptcy Contact A Local Attorney
While the articles in this section provide additional detail about the basics of bankruptcy, it can be a wise decision to speak with a skilled bankruptcy attorney near you.
An attorney can help you determine which form of bankruptcy is the best choice to resolve your debt crisis and guide you through the process of filing for bankruptcy.
What Are Some Different Bankruptcy Options
Bankruptcy is a legal process to help individuals or businesses who cannot pay their current debt. There are a few different bankruptcy options depending on the individuals or businesses situation. Bankruptcies are filed in federal court and there is a fee to file.
Bankruptcy options for personal debt include a Chapter 7, which is the most common type of bankruptcy. This involves a liquidation of assets. After an individual shows proof of debt, income and assets, the bankruptcy court reviews the financial records and determines if the debt to income ratio is high enough to grant a bankruptcy.
Certain assets may be seized by the court, then sold and the money is divided up and given to the creditors. The remaining debt would be eliminated through the court. Certain types of debt are prohibited by law from being eliminating, for instance, child support, federal student loans or taxes owned to the Internal Revenue Service are not eliminated.
Some assets are protected by state and federal law and considered exempt from liquidated in a chapter 7. For example, retirement accounts, such as a 401 are protected. Although exemptions may vary, they usually include a car, primary home, clothes and furniture.
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What Happens To Your Credit Rating After Discharge
The official receiver wont tell the credit agencies when your bankruptcy ends. You may need to ask the credit agencies to update their records to include details of your discharge.
The bankruptcy can stay on your record for 6 years after the date of the bankruptcy order.
Read more on this in the Information Commissioners Office Credit explained document.
Which Chapter Is Best For You
The choice of which type of bankruptcy to file depends on many factors that are specific to your situation, and this is one of the most important reasons to get good legal advice before filing. Which chapter is best for you depends on the nature of your debt and the nature and value of your assets. At Arentz Law Group, PLLC, their Phoenix, Arizona bankruptcy attorneys offer a free debt evaluation and want to help you to make the best decision.
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Exceptions To The Discharge Of All Debts
Some debts are not erased. Bankruptcy generally only extinguishes unsecured debts things like credit cards, personal loans, income taxes, overdrafts, etc.
A secured debt, such as a car loan or mortgage, may not be included. Since you have given an asset as collateral, your creditor can recover the amount owing to them. Any shortfall can be dealt with in the bankruptcy.
Some unsecured debts are also not discharged in a bankruptcy, such as student loans where you were last in school less than 7 years from the date of bankruptcy, alimony or child support obligations, fines or penalties imposed by the Court, as well as any debt arising from fraud.
Your Credit Could Take A Hit
The other major consequence of a Chapter 7 bankruptcy is the impact to your credit. A Chapter 7 bankruptcy can stay on your credit reports for up to 10 years from the date you file.
That doesnt mean youll never be able to open a credit card or take out a mortgage again, but it does mean you might have to pay a lot more in interest rates and fees when borrowing.
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How Can A Business Avoid Bankruptcy
There are several steps you can take to avoid bankruptcy. Your business should focus on paying off debt and cutting unnecessary expenses. Do not avoid your lenders or their calls. You must keep communication open, as you might extend the time you have to pay off debts or loans.
Since COVID-19 restricts what most businesses can do during the pandemic and quarantines, speak to an attorney before filing for a business bankruptcy chapter. We specialize in negotiation, which doesnt have to take place in court. That may allow you to restructure your business in the meantime.
No company starts with the knowledge that it will go bankrupt. The economic health of many countries is in danger because of the outbreak. Production has slowed and even halted in cities around the world. With travel restrictions and complete border lockdowns, the main priority is survival.
Thousands of people are being laid off, and companies cannot continue to pay salaries or debts without income. Essential suppliers are unable to deliver their products to their clients, and this is a growing problem with no easy solution. Our attorneys at The Pope Firm understand the frustration and stress that come with running a company, especially amid a global crisis.
Before you turn to bankruptcy, talk to a professional. You might have more options than you thought, and you may be able to avoid bankruptcy altogether.
Why Would You Choose Chapter 11 Bankruptcy For Your Small Business
Chapter 11 is one of the more complicated options for bankruptcy, and the process can be lengthy. At the Pope Firm, we can help you assess whether Chapter 11 is the right option for you and your small business.
Since Chapter 11 can be more challenging, why would you choose to file it for your small business?
- You are not classified as the sole proprietor of your business.
- Your business is an LLC, corporation, or partnership.
- You want to keep your business functioning during the bankruptcy process.
- The amount of debt you owe is higher than what Chapter 13 allows.
- You want to prevent liquidating your assets. In some cases, the conclusion agreed upon by the creditors and debtors still requires liquidating assets, but it is not common.
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Formal Options Under The Bankruptcy Act 1966
There are four formal options available to you under the Bankruptcy Act 1966, each having serious consequences. We encourage you to read the following and seek your own independent advice before making a decision.
- This option provides you with a 21 day protection period from being pursued by unsecured creditors while you seek help and decide how to proceed.
- Lasts for 3 years and 1 day. At the end of this period you are released from most of your debts.
- These are binding agreements between you and your creditors to pay a sum you can afford.
- These are agreements between you and your creditors to pay an agreed amount in instalments or lump sum.
Exceptions To The Surrender Of All Assets
Some assets are not taken from you in bankruptcy. These are the exemptions that the federal and provincial governments have determined you need to survive and be a productive member of society. The goal of bankruptcy is to give you a fresh start not to punish or humiliate you. You will typically retain personal items and furnishings.
The list of exemptions is set by each provincial or territorial government. For example, in Saskatchewan, a motor vehicle with a value not exceeding $10,000.00 is exempt along with personal items such as clothing and jewelry to the extent of $7,500.00 and all household furnishings and appliances. In addition, RRSPs, RDSPs as well as equity in your residence to a maximum of $50,000.00 per registered owner are exempt from seizure. For the relevant exemptions in your province, we recommend speaking with a Licensed Insolvency Trustee.
For most people, the assets that may be lost in a bankruptcy include certain non-registered investments, RESPs, recreational equipment such as a boat, snowmobile, or motorcycle, etc.
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What Happens When I File A Chapter 7 Case
A bankruptcy proceeding is initiated by filing a petition with the bankruptcy court. When you file for Chapter 7 liquidation, the petition operates as an automatic stay, which generally prevents creditors from pursuing debt collection actions against you unless the bankruptcy judge approves it first. The automatic stay goes into effect immediately upon filing the petition no court hearing or approval by a judge is necessary. When the case is filed, the United States trustee for your judicial district appoints a trustee to review your financial affairs and administer your case. The appointed trustee has the power to liquidate any asset you own that is not by law exempt from collection or subject to a lien in order to pay your creditors.
Payments From Your Income
If you can afford it, the trustee will ask you to make regular payments towards your debts from your income through an income payment agreement . You enter an IPA voluntarily, but theres a written binding agreement between you and the trustee.
If your main or only income is state benefits, the trustee will not normally try to get an IPA.
If you cant agree on payment amounts for an IPA, the trustee can apply for an income payment order . If you dont meet these payments, the trustee can then apply to extend your bankruptcy.
The payments will come from surplus income .This is money you have left after paying your living expenses. Normally you will have to pay all of this surplus income as your IPA payment.
Payments normally last for 3 years . The court wont make an IPO if it leaves you without enough money to meet everyday needs.
The official receiver may use private debt collection agencies to collect the payments.
A fee will be charged in all bankruptcy cases where an IPA or IPO is set up. The fee is set at £150 which will cover the specific costs incurred by the Official Receiver of arranging and setting up your IPA / IPO and will be collected from the first payments you make into the arrangement. This fee is only chargeable on cases where a bankruptcy application was made or a petition presented on or after the 21 July 2016.
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What Are The Different Types Of Personal Bankruptcy
Personal bankruptcy is a final option for individuals who cannot pay their debts. Through bankruptcy, they are given a chance to make a fresh start. Although declaring bankruptcy is a stressful procedure, it is an option for those who have debt growing at a rate faster than they are able to pay it off. There are two types of personal bankruptcy, Chapter 7 and Chapter 13.
Chapter 7 bankruptcy requires the debtor to gather up and claim all of their assets. Assets include homes, cars, and boats, as well as valuable household items, personal possessions, and savings accounts and investments. States have different guidelines about what exemptions a person can keep. Any investments or similar assets are liquidated, and then all assets are handed over to the court. From there, the property is sold. Any money received from the sale is used by the courts to pay the back debt of the individual filing for personal bankruptcy. Any debts not paid are released, and the debtor starts fresh, with no debt.
When Should I Declare Bankruptcy
When asking yourself Should I file for bankruptcy? think hard about whether you could realistically pay off your debts in less than five years. If the answer is no, it might be time to declare bankruptcy.
The thinking behind this is that the bankruptcy code was set up to give people a second chance, not to punish them forever. If some combination of bad luck and bad choices has devastated you financially, and you dont see that changing in the next five years, bankruptcy is your way out.
Even if you dont qualify for bankruptcy, there is still hope for debt relief. Possible alternatives include a debt management program, a debt consolidation loan or debt settlement. Each one of those choices typically require 3-5 years to reach a resolution, and none of them guarantees all your debts will be settled when you finish.
Remember that bankruptcy carries significant long-term penalties. It is stuck on your credit report for 7-10 years, which can make getting loans in the future very difficult.
The flip side of that is there is a great mental and emotional lift when all your debts are eliminated, and youre given a fresh start.
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