Bankruptcy Facts – An Overview From Fort Lauderdale Attorney
Filing bankruptcy is an important legal right. Here are some important bankruptcy facts you should know.
The Constitution of the United States, Article I, Section 8, Clause 4, provides Congress with the power to establish uniform laws on the subject of Bankruptcies throughout the United States. That provision was included by our Founding Fathers in reaction to the “debtor’s prisons” of colonial times, in which individuals could be imprisoned for their debts. Since the year 1800 this country has had formal bankruptcy laws for the benefit of U.S. residents. Our current bankruptcy code was adopted in 1978, providing a major overhaul of the system. New legislation took effect October 17, 2005 which substantially revised the Bankruptcy Code again. However, most people in financial distress can still file for bankruptcy protection. We can give you the information you need to know about filing bankruptcy. We have been representing individuals and businesses in bankruptcy matters for over 30 years. Please call us with your questions at 954-356-0450 or email us. Our offices in Plantation, Broward County are convenient to Coral Springs, Fort Lauderdale, Sunrise and Davie.
The Bankruptcy Code provides for six separate types of proceedings. Since Chapters 9 and 12 are available only to municipalities or family farmers, respectively, and Chapter 15 concerns foreign proceedings, they will not be discussed in this article. See our separate discussions on Bankruptcy Planning and Involuntary Bankruptcies. For information on South Florida bankruptcy preference claims see our Preference Page. For more on bankruptcy options for small businesses see our Business Bankruptcy page. For more on complex cases see our Complex Bankruptcy page.
Chapter 7 Bankruptcy
A Chapter 7 liquidation proceeding is available to individuals, partnerships, and corporations. The debtor is allowed to keep exempt assets.
Chapter 13 Bankruptcy
A Chapter 13 bankruptcy, or “wage earner reorganization” is available only to individuals with regular income. It requires that the debtor file a plan providing for payment to creditors over a period of up to five years. The CARES Act temporarily allows for seven year plans. The benefits of a Chapter 13 include the ability to reinstate a home mortgage that is in default, stop IRS collection efforts while payments are made, the ability to retain non-exempt real estate and personal assets, and a broader form of discharge.
Chapter 11 Bankruptcy
A Chapter 11 reorganization is available to individuals and businesses. Due to the higher court fees, reporting requirements and legal fees involved in a Chapter 11, it is only used by individuals with combined debts of over $1,000,000.00. However, it may provide individuals and businesses with an opportunity to reorganize their debts and make arrangements to pay all or a portion of the debts, or sell the business, while obtaining protection from creditors. A Chapter 11 generally provides more flexibility than a Chapter 13 reorganization for individuals.
There is also a new Small Business Chapter 11 for businesses with debt of less than $2,725,625.00. The CARES Act recently passed by Congress has temporarily increased the debt limit to $7,500,000.00. The new provisions are designed to speed up the process and reduce the costs. However, in a Sub-Chapter V Small Business Chapter 11 a trustee distributes payments, so trustee fees will be charged.
Businesses in financial trouble can seek protection from creditors in Chapter 11 while a plan of reorganization is worked out. For small business a Chapter 11 bankruptcy filing allows the business to reorganize its debts and make arrangements to pay all or a portion of the debts while obtaining protection from creditors.
A small business Chapter 11 also may be used to sell the business as a going concern. In many cases a small business can continue in operation and jobs can be saved by selling the business as a going concern to a friendly group of investors. Our office has filed numerous Chapter 11 cases in Broward County and throughout South Florida and can help you with this process.
If your business has suffered a temporary setback a Chapter 11 may give you the time you need to get caught up on bills. It also provides a forum to negotiate with all creditors in a setting favorable to the business. Call us if you would like an assessment of whether a Chapter 11 can help your business. We work hard for our clients to find the right solution for any business situation. For more on Chapter 11 see our Chapter 11 page or Business Bankruptcy page.
We can assist you in filing an Offer in Compromise to settle a tax obligation with IRS. Some older tax obligations can be included in a bankruptcy. Most individuals are unaware that they may be able to discharge some or all of their older income tax obligations in bankruptcy. Dischargeability of these taxes turns on the question whether or not they are “priority” claims. Tax obligations which are non-priority are dischargeable.
The Bankruptcy Code provides that taxes assessed by a governmental agency which are based on income (income taxes) lose their priority status when:
(a) the tax return, with all extensions, was due more than three years prior to filing for bankruptcy protection;
(b) a return was filed at least two years prior to the filing for bankruptcy relief;
(c) the tax obligation was assessed at least 240 days prior to filing; and
(d) the tax payer is not guilty of fraudulent conduct or tax evasion and has not signed an offer in compromise or other settlement agreement.
Certain penalties and interest may also be dischargeable. Penalties designed to compensate the agency for actual loss are non-dischargeable while those which are punitive in nature may lose priority and become dischargeable. Employment taxes are not dischargeable regardless of the age of the tax claims. This is true whether the obligation arose because the debtor was the employer or a responsible officer.
Bankruptcy protection also provides a means to stop IRS collection procedures for a period of time while payments are made. Bankruptcy Code § 362, which grants debtors automatic relief from collection activity, applies to the IRS in the same manner as other creditors. The period of relief depends on many factors, including whether the tax payer files for relief under Chapter 7, 11 or 13. Priority and non-priority taxes can be treated in a Chapter 11 or Chapter 13 plan and paid out over time. The bankruptcy stay remains in effect until the Plan is completed or the case dismissed. This may allow a business which has been seized by the IRS to re-open and operate under a Chapter 11 Plan without interference from the IRS or other creditors. The filing of a Chapter 7 stays all collection proceedings until the entry of a discharge or dismissal of the case See our page on Violation of the Automatic Stay or Discharge Injunction.
This article is not intended as a substitute for competent legal or accounting representation, but merely as a guide to help you decide whether you need the services of a licensed attorney or CPA.