Liquidating vs. Reorganizing: A Guide to Your Options During Bankruptcy

When you are contemplating bankruptcy, it may seem as if you don’t have a lot of options about how it will be executed. Fortunately, this is not the case. The law recognizes that the bankruptcy method for one person may not be appropriate for another. This is why there are essentially two different types of bankruptcy: reorganization and liquidation.

First, what is bankruptcy in general? It is a method by which a person, couple, or business that has taken on more debt than they can pay can get a fresh financial start through negotiating with their creditors and paying off debts. It’s almost like performing a hard reboot on your computer—it’s not something you want to do, but sometimes, it is the only thing that works to get things working again. Bankruptcy proceedings are done through the court system, which acts like a referee between the debtor and their creditors, as well as decides which creditors get paid and how much.

The process is started, however, by the choice of the debtor between seeking to pursue their bankruptcy through liquidation (Chapter 7) or reorganization (Chapter 13):

Liquidation or Chapter 7 bankruptcy, involves taking all of the debtor’s non-essential assets, selling them off, and using the proceeds to pay off the creditors. Non-essential assets include a person’s house, car, tools that they use to make a living, and even pensions. What is considered “non-essential” varies from state to state so having competent and knowledgeable counsel by your side is essential.

Reorganization, or Chapter 13 bankruptcy (Chapter 11 is mostly for businesses), refers to reorganization of your debts. It is used to keep the original agreement such as a mortgage or car note in place, but allows you to make up missed payments without getting further behind. Reorganization allows you to keep your non-essential property, as your income is used to pay your debts—except on a payment plan that has been negotiated with your creditors. The bottom line of reorganization is that the debtor must pay some of the debt from their income as opposed to using proceeds of the sale of their items.  

While Chapter 7 and Chapter 13 are sometimes both available options, there are also situations where one may be more desirable than another, and even where only one is available. For example, there is a means test used to determine whether someone is eligible to file for Chapter 7 liquidation. Chapter 7 is not available if your income during the six months just prior to the filing is more than a similarly-sized household’s median income in your state. Also, if your disposable income would allow you to make payments under Chapter 13, then Chapter 7 is likely not an option for you.

While Chapter 7 is the the most popular form of bankruptcy, it comes at a steep price to the debtor since they are left with only their essential assets and the need to start over again. Chapter 13 allows for the debtor to keep more of their assets in the long run but does require that the debtor use some of their disposable income to pay the debt. Both, however, are designed to allow the debtor to get a fresh start and get back on their financial feet.

If you are contemplating filing for bankruptcy, you don’t have to do it alone, nor should you. Tim Starosta can guide you through the bankruptcy process and will work to help you get back on your feet. Call 816-399-5733 today to get started.

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The Starosta Law Firm LLC

The Starosta Law Firm is a small firm dedicated to providing every client with the customized representation they require, no matter what type of situation they are facing.

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