Are you considering bankruptcy but aren’t sure which form would be best for your financial situation? This post walks you through the basics of bankruptcy so you can make an informed decision about your next steps.
According to FindLaw, “Bankruptcy is a generalized term for a federal court procedure that helps consumers and businesses get rid of their debts and repay their creditors.” Of the various bankruptcy types, the three discussed below are the most common for individuals and businesses.
Both individuals and businesses are allowed to file for Chapter 7 bankruptcy if they meet certain eligibility requirements. Chapter 7 proceedings can take between three and six months.
In Chapter 7, the taxpayer seeks to have their debts simply discharged, meaning these debts will be forgiven. If a business files a Chapter 7 bankruptcy, the business will be immediately closed and all assets liquidated. Businesses do not require discharges in Chapter 7 bankruptcy proceedings.
This type of bankruptcy is typically used by struggling businesses who want to reorganize their business debts. Some individuals may also choose to use Chapter 11 for debt reorganization.
Chapter 11 proceedings allow the filer to discharge those debts that can be discharged. The remaining debts are reorganized into a repayment plan overseen by a bankruptcy trustee. Tax debts must be repaid within 60 months of filing.
In Chapter 13 proceedings, individuals who have a reliable source of income are allowed to restructure their debts in order to pay back their creditors. Some debts may be able to be discharged. Otherwise, a bankruptcy trustee oversees a forced repayment plan, usually lasting no more than 60 months. Businesses are not eligible for Chapter 13 filings.
The Automatic Stay
Section 362 of the Bankruptcy Code provides that all collection activity by creditors must cease once the taxpayer files for bankruptcy. There are few exceptions to this part of the code.
One immediate effect is that this filing can put a stop to all IRS and state revenue departments’ collection efforts against the taxpayers and their property. The bankruptcy filing removes the case from the IRS Collections Division and moves it to the IRS’s Insolvency Unit. This automatic stay can give a taxpayer immediate relief to work out a plan through bankruptcy when the IRS and states may have otherwise been unwilling to work with the taxpayer.
Beyond bankruptcy basics: get expert advice
All options for filing bankruptcy should be made in consultation with a knowledgeable and experienced bankruptcy attorney. Contact us for assistance with the tax and financial aspects of bankruptcy proceedings.