Alternatives to Chapter 7 Bankruptcy

There are several alternatives to chapter 7 relief. For example, debtors who are engaged in business may prefer to remain in business and avoid liquidation. Business owners should consider filing a petition under Chapter 11. Under Chapter 11, the debtor may seek an adjustment of debts, either by reducing the debt or by extending the time for repayment, or may seek a reorganization. Sole proprietorships may also be eligible for relief under chapter 13 of the Bankruptcy Code.

In addition, individuals who have regular income may seek an adjustment of debts under Chapter 13. A particular advantage of Chapter 13 is that individual debtors can save their homes from foreclosure by allowing them to “catch up” past due payments through a payment plan. The court may dismiss a Chapter 7 case filed by an individual whose debts are primarily consumer rather than business debts if the court finds that the granting of relief would be an abuse of Chapter 7.

If the debtor’s “monthly income” is more than the state average, the Code requires a “means test” to determine whether the Chapter 7 filing is allowed. It is thought to be abuse if the debtor’s aggregate current monthly income over 5 years, with certain exemptions, is more than $11,725, or 25% of the debtor’s unsecured debt, as long as that amount is at least $7,025. The debtor may object to this presumption a showing of special circumstances that justify expenses or adjustments of current monthly income. If debtor does not overcome the presumption of abuse, the case will generally be converted to Chapter 13 or will be dismissed.

Debtors should also be aware that out-of-court agreements with creditors or debt counseling services may provide an alternative to a bankruptcy filing.