By Katherine Rea and Adam Floyd
One of the first major pieces of bankruptcy reform in well over 10 years will provide much-needed bankruptcy relief to debtors and businesses that many suspect have been deprived of access to bankruptcy protection. The federal legislation comes in three pieces: the Family Farmers Relief Act (“FFRA”), the Honoring Americans in Extreme Need (“HAVEN”) Act, and the Small Business Reorganization Act (“SBRA”). The SBRA will take effect February 19, 2020, and the other pieces of the code change were implemented when President Donald Trump signed the law in August 2019.
Types of bankruptcy relief
Before discussing the amendments, it is useful to have a little bit of background on the types of bankruptcy relief. Generally, there are two types of bankruptcies: liquidation and reorganization. In both types, an “estate” is created on the day the petition is filed.1 For reorganization bankruptcies, the estate is usually augmented by assets acquired after the case is filed2 ; for liquidation bankruptcies, the estate is mostly set as of the date of the petition.3 The status of a debt – that is, secured, unsecured, perfected, priority – is also generally set as of the date the case is filed. The debtor then can protect some of her assets through state and/or federal law exemptions.5
If the debtor is in a liquidation Chapter 7 bankruptcy, an appointed trustee liquidates unprotected, lien-free assets and distributes to creditors in an order of priority.6 Secured debts survive the bankruptcy and are generally unaffected; unsecured debts receive distributions if there are any assets to distribute (there frequently are not), and then these debts are discharged.7 There are very few limitations on what types of legal entities can file for Chapter 7 liquidation.8 For individuals, however, there are income caps.9 Although a Chapter 7 of a legal entity may last for years, for most consumers, a Chapter 7 bankruptcy only lasts a few months before the debtor receives the much-coveted discharge.
If an individual cannot file for Chapter 7 bankruptcy, that individual generally must file a Chapter 13 bankruptcy.10 In exchange for the discharge, Chapter 13 bankruptcy requires a debtor to propose a bankruptcy plan; a court to approve the plan; and the debtor to then successfully complete payments under the plan.11 The plan must treat all secured debts and pay some percentage, determined by debtor’s assets and income, to unsecured creditors. Most secured debts, with the notable exception of home mortgages, can be modified, and delinquent mortgages can be caught back up.13 Debtors generally do not need creditor consent to modify debts, provided the modification is consistent with Bankruptcy Code provisions. While in the plan, the debtor makes payments to a Chapter 13 trustee, who monitors the debtor’s progress, collects funds, and makes distributions to creditors.14 The primary limitation on individuals filing Chapter 13 is the size of the debts: they must be under $1.6 million.15
Table 1: Bankruptcy Filings in Perspective in South Carolina
Source: U.S. Bankruptcy Courts – Bankruptcy Cases Filed, Terminated, and Pending, December 31, 2014 – 18, available at www.uscourts.gov/statistics-reports/caseload-statistics-data-tables, last accessed November 19, 2019.
|Year||Total Nationwide Filings||Total South Carolina Filings||Chapter 7||Chapter 11||Chapter 12||Chapter 13|