There are many situations where businesses may have trouble paying debts and meeting other financial obligations while continuing to operate. In some cases, a business may seek to reorganize its operations and pay off as much of its debts as possible by pursuing Chapter 11 bankruptcy. However, this can be a long and involved process, and many small businesses may not have the resources to complete this type of reorganization while meeting all reporting requirements and paying the related costs. Fortunately, a recent change to the law has allowed some businesses to complete a Chapter 11 bankruptcy through a process that is faster and more efficient.

Small Business Debtor Reorganization

The Small Business Reorganization Act, which went into effect in 2020, created new procedures for a Chapter 11 bankruptcy. Because these procedures are outlined in Subchapter V of Chapter 11 of the U.S. Bankruptcy Code, this type of bankruptcy is often referred to as a “Chapter 5” case. Initially, Chapter 5 bankruptcy was available for businesses with aggregate debts up to around $2.7 million. However, the CARES Act of 2020, which provided relief for Americans affected by the COVID-19 pandemic, increased the qualifying amount of debt to $7.5 million.

One of the primary differences between a Chapter 5 bankruptcy and other Chapter 11 bankruptcy cases is that a creditors’ committee will not be created in a Chapter 5 case. A debtor’s plan for the reorganization of their business will not need to be approved by creditors. However, a business’s plan for reorganization must include information about the history of the business, an analysis that details payments that could be made to creditors in a potential liquidation of the business’s assets, and the amount of the expected payments that will be made to creditors under the plan. A bankruptcy court will generally confirm a reorganization plan if it treats creditors fairly and equitably, and creditors must receive an amount equal to or greater than what they would be able to recover in a Chapter 7 bankruptcy.

One of the benefits of filing for bankruptcy is that doing so places an automatic stay on collection actions by creditors. This means that creditors will be prohibited from making any attempts to collect debts while the bankruptcy case is ongoing, including contacting a debtor through phone calls, letters, garnishing their wages, or foreclosing on a person’s home. The automatic stay gives a person the opportunity to assess their financial situation and determine their options during the bankruptcy process without the requirement to repay certain debts during this time. However, there are certain types of exceptions to the automatic stay, and a person will need to understand how these will apply in their case.

Issues That Are Not Affected by the Automatic Stay

The following types of actions are not covered by the automatic stay in a bankruptcy case:

• Criminal cases - If a person is facing criminal charges, filing for bankruptcy will not affect these proceedings, and it will not stop the collection of fines, fees, or restitution that a person is ordered to pay to a victim.

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Debtors have multiple options for addressing debts through bankruptcy. For those who have secured debts such as a home mortgage or other loans where they wish to maintain ownership of the collateral, or in cases where a family’s income exceeds a certain threshold, Chapter 13 bankruptcy may be the best option. In these cases, the debtor will propose a repayment plan in which they will put their disposable income toward paying off as much of their debts as possible over a period of three or five years, and after completing all payments in the plan, they will receive a discharge of the unsecured debts that are remaining. However, debtors may be concerned about what will happen if they encounter financial difficulties that affect their ability to make these payments. In these situations, a debtor may qualify for a hardship discharge.

Eligibility for a Hardship Discharge

Typically, if a debtor does not make all of the payments in a Chapter 13 repayment plan, their bankruptcy case may be dismissed, and they will continue to owe debts to creditors. However, if a debtor becomes unable to continue making payments in their plan, they may ask the court to approve a hardship discharge, which will allow the remaining debts in the plan to be eliminated. To qualify for a hardship discharge, a debtor must meet the following requirements:

• The debtor must be unable to complete their repayment plan through no fault of their own and due to circumstances that are out of their control. For example, a serious illness may have caused a person to be unable to work full-time, leading to a reduction in income and an inability to make payments. A debtor will usually need to show that the conditions that have affected their ability to complete the repayment plan are expected to be long-term or permanent rather than a short-term or temporary setback.

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If you have significant debts that have led to financial struggles for your family, you may be considering bankruptcy. If you want to be able to maintain ownership of your home, or if you want to avoid the repossession of a vehicle or other property, Chapter 13 bankruptcy may be the best option for you. In this type of bankruptcy, certain debts are grouped together in a repayment plan that will last either three or five years. After completing this plan, any unsecured debts that remain will be eliminated. As you prepare to file for bankruptcy, you will want to understand how your repayment plan will be calculated.

Creating a Repayment Plan in a Chapter 13 Bankruptcy

When you file for bankruptcy, you will be required to provide documentation detailing information such as a list of all of your creditors, the total income you earn and how often you are paid, an inventory of all of your assets, and details about your regular expenses. This information will be used to determine your disposable income, or the amount that is available to pay debts after covering your living expenses.

Your disposable income will be determined by taking your income and subtracting all reasonable expenses that are necessary for the support of yourself and your dependents. Applicable expenses include the costs of food, clothing, utilities, medications, or other forms of medical care, taxes, and transportation expenses such as gas, car insurance, and vehicle maintenance. You can also set aside up to 15 percent of your gross income for charitable contributions. Your projected disposable income will be any amount that remains after deducting expenses, and this amount will be put toward your Chapter 13 repayment plan.

Financial issues are one of the most common factors that can lead to the breakdown of a marriage. Disagreements can range from a difference of opinion about how to handle savings, purchases, and the payment of expenses to more serious issues, such as one spouse hiding money from the other or wasting funds on lavish purchases or gambling. When a couple has significant debts, either spouse may feel that bankruptcy would be a good solution. However, this can be a difficult issue to address for a couple that is considering divorce or has already begun the divorce process, and if it is not handled correctly, it can lead to financial problems for both parties. When determining how to address bankruptcy and divorce, a couple can work with an attorney to determine the best approach to take.

Should We File for Divorce or Bankruptcy First?

Determining the appropriate time to file for bankruptcy will usually depend on the type of debt relief that one or both spouses are seeking. Spouses who have large unsecured debts, such as credit card balances, but do not have secured debts, such as home mortgages or auto loans, may be looking to file for Chapter 7 bankruptcy. In these cases, it may be beneficial for a couple to file for bankruptcy together before filing for divorce. As long as the spouses are able to pass the means test and complete other requirements during this type of bankruptcy, they can have their debts discharged before moving forward with their divorce. This will simplify the process of dividing marital property and ensure that both spouses will be able to move on with their lives and support themselves once their divorce has been finalized.

If a couple does not pass the means test to qualify for Chapter 7 bankruptcy, or if they have secured debts, they may be required to use Chapter 13 bankruptcy to consolidate and repay certain types of debts. It is usually not a good idea to do so before filing for divorce since this type of bankruptcy will create a repayment plan that will last between three and five years. Divorce will affect both parties’ financial circumstances and their ability to complete the repayment plan. If a couple has an existing repayment plan when they file for divorce, their bankruptcy case may need to be reopened and separated between the parties, or it may even be dismissed.