The differences between Personal and Business bankruptcy

The Crossroads of Financial Distress: Navigating Personal and Business Bankruptcy in Texas

Financial hardship can strike at any time, impacting both individuals and business entities. When faced with overwhelming debt, navigating the complexities of bankruptcy can seem like a daunting prospect. In Texas, as in many jurisdictions, there are two primary bankruptcy code chapters that offer relief to debtors struggling with financial burdens: Chapter 7 and Chapter 13. However, a crucial distinction exists between these chapters – whether they apply to personal or business bankruptcy.

Here at Warren & Migliaccio, L.L.P. in Richardson, Texas, we understand the emotional and financial strain associated with debt. Our law firm specializes in a variety of legal matters, including bankruptcy. In this informative blog post, we’ll delve into the distinctions between personal and business bankruptcy in Texas, empowering you with the knowledge to make informed decisions regarding your financial situation.

We’ll explore the eligibility requirements, available relief options, and the overall process for both Chapter 7 and Chapter 13 bankruptcy, specifically tailored to individuals and businesses operating within the Lone Star State. We’ll also address frequently asked questions concerning personal versus business bankruptcy proceedings in Texas.

So, you’re facing financial difficulties. What path should you take?

The decision to file for bankruptcy shouldn’t be taken lightly. Consulting with an experienced bankruptcy attorney is paramount. They can assess your unique circumstances, analyze your debt structure, and guide you towards the most suitable course of action, be it personal or business bankruptcy.

Understanding the Fundamentals: Chapter 7 vs. Chapter 13

Before we delve into the specifics of personal and business bankruptcy in Texas, let’s establish a foundational understanding of Chapter 7 and Chapter 13:

• Chapter 7 Bankruptcy: Often referred to as “liquidation bankruptcy,” Chapter 7 allows for the discharge of most unsecured debts, such as credit card debt, medical bills, and personal loans (11 U.S.C. § 727) (source). However, certain debts like child support, student loans, and tax liabilities generally cannot be discharged through Chapter 7 (11 U.S.C. § 523(a)) (source). In a Chapter 7 case, a court-appointed trustee may liquidate non-exempt assets (assets not protected by Texas exemptions) to partially satisfy creditors (11 U.S.C. § 704) (source). Texas follows a generous exemption scheme, allowing debtors to shield a significant portion of their assets from liquidation (Texas Code of Civil Procedure § 42.001 [invalid URL removed]).
• Chapter 13 Bankruptcy: Chapter 13, also known as “reorganization bankruptcy,” offers an opportunity to restructure your debt and create a repayment plan over a period of 3-5 years (11 U.S.C. § 1322) (source). This plan proposes how you’ll use your future income to make monthly payments to a court-appointed trustee, who then distributes the funds to your creditors (11 U.S.C. § 1326) (source). Chapter 13 allows for the repayment of most debts, including those typically non-dischargeable in Chapter 7, such as tax liabilities and certain student loans (11 U.S.C. § 1322(b)) (source).

Personal Bankruptcy in Texas

Now that we have a basic understanding of Chapter 7 and Chapter 13, let’s explore how these bankruptcy options apply to individuals in Texas:

• Eligibility for Personal Bankruptcy: Unlike some states that impose a means test for Chapter 7 eligibility, Texas does not. This means there’s no strict income limitation on filing for Chapter 7 bankruptcy in Texas. However, the court will consider your overall financial situation, including income, expenses, and assets, to determine whether Chapter 7 is the most suitable option 

• Eligibility for Personal Bankruptcy (continued): The court will also examine whether you have abused the bankruptcy system by filing for bankruptcy too recently in a prior case. Additionally, there’s a mandatory credit counseling course and a financial management course that debtors must complete before receiving a discharge in a Chapter 7 case (11 U.S.C. § 109(g)) (source).
• Debt Relief Options for Personal Chapter 7: As mentioned earlier, Chapter 7 allows for the discharge of most unsecured debts. This can provide a significant fresh start for individuals struggling with overwhelming credit card debt, medical bills, and personal loans. However, it’s crucial to remember that certain debts, like child support, student loans, and most tax liabilities, are not dischargeable in Chapter 7 (11 U.S.C. § 523(a)) (source).
• Debt Relief Options for Personal Chapter 13: Chapter 13, on the other hand, focuses on creating a repayment plan. This option can be beneficial for individuals with regular income who want to keep their assets but are struggling to make minimum payments on their debts. Through a Chapter 13 plan, you propose a feasible repayment schedule over 3-5 years, utilizing your future income to make monthly payments to a court-appointed trustee (11 U.S.C. § 1322) (source). This plan allows for the potential modification of certain secured debts, such as mortgages and car loans, potentially reducing your monthly payments (11 U.S.C. § 1322(b)(5)) (source). Importantly, Chapter 13 also offers protection from creditor lawsuits and collection actions while your plan is in effect (11 U.S.C. § 362) (source).

Key Considerations for Personal Bankruptcy in Texas:

• Impact on Credit Score: Filing for bankruptcy will undoubtedly have a negative impact on your credit score. Chapter 7 typically remains on your credit report for 10 years, while Chapter 13 can stay on your report for up to 7 years (Federal Trade Commission (source)). However, responsible credit management practices after filing for bankruptcy can help rebuild your credit score over time.
• Exemptions: Texas offers a generous exemption scheme, allowing debtors to shield a significant portion of their assets from liquidation in a Chapter 7 case. This includes your primary residence (up to a certain equity limit), household goods, tools of the trade, and a motor vehicle (up to a specific value) (Texas Code of Civil Procedure § 42.001 [invalid URL removed]). An experienced bankruptcy attorney can advise you on the specific exemptions available under Texas law and develop a strategy to maximize the protection of your assets.
• Alternatives to Bankruptcy: Before resorting to bankruptcy, it’s advisable to explore other debt-relief options, such as debt consolidation loans, credit counseling, or negotiating settlements with creditors. These strategies may not be suitable for everyone, but they can be worth considering depending on your specific circumstances.

Business Bankruptcy in Texas

When a business entity faces financial hardship, bankruptcy can provide a potential path to restructure its debt and achieve financial viability. Texas recognizes the following chapters of the Bankruptcy Code for business entities:

• Chapter 7 Bankruptcy for Businesses: Similar to personal Chapter 7, business Chapter 7 involves the liquidation of assets to partially satisfy creditors. However, unlike personal Chapter 7, business Chapter 7 typically results in the closure of the business (11 U.S.C. § 701) (source) 

• Chapter 7 Bankruptcy for Businesses (continued): (source) . A court-appointed trustee will oversee the liquidation process, selling off the business’s assets and distributing the proceeds to creditors according to a priority scheme established by the Bankruptcy Code (11 U.S.C. § 726) (source). It’s important to note that unlike individuals, businesses are not entitled to discharge their debts in Chapter 7. The responsibility for outstanding obligations may shift to the owners of the business depending on the business structure (e.g., sole proprietorship, corporation, LLC).
• Chapter 11 Bankruptcy for Businesses: This chapter offers a more complex approach, allowing businesses to reorganize their debt structure and develop a repayment plan (11 U.S.C. § 1101) (source). The business remains operational under court supervision while it negotiates with creditors to modify loan terms, extend repayment schedules, and potentially reduce the overall debt burden (11 U.S.C. § 1121) (source). Chapter 11 is typically a more expensive and time-consuming process compared to Chapter 7, but it can be a viable option for businesses with a strong potential for recovery.

Key Considerations for Business Bankruptcy in Texas:

• Business Structure: The type of business entity (sole proprietorship, corporation, LLC) will significantly impact the bankruptcy process. For instance, in a sole proprietorship, the business and the owner’s personal finances are often intertwined. This can lead to personal liability for the owner’s business debts, even after filing for bankruptcy. Consulting with an experienced bankruptcy attorney is crucial to understand the specific implications of bankruptcy for your chosen business structure.
• Impact on Business Operations: Chapter 7 bankruptcy typically results in the cessation of business operations. Chapter 11, on the other hand, allows the business to continue operating while restructuring its debt. However, even under Chapter 11, there may be disruptions to normal business activities during the reorganization process.
• Alternatives to Bankruptcy: Similar to personal bankruptcy, exploring alternatives like debt negotiation, asset sales, or securing additional funding may be preferable to filing for bankruptcy. A qualified business attorney can assess your situation and recommend the most suitable course of action for your specific circumstances.

Choosing Between Personal and Business Bankruptcy:

The decision to file for personal or business bankruptcy hinges on your specific financial situation. Here are some key questions to consider:

• Is the financial hardship personal or business-related? If the debt is solely associated with your individual finances, then personal bankruptcy may be the appropriate option. If the debt is tied to your business operations, then business bankruptcy might be a better fit.
• Do you plan to continue operating the business? If you wish to keep the business running, then Chapter 11 bankruptcy could be a possibility. However, if closure is inevitable, then Chapter 7 might be the more efficient option.
• What assets do you own (personal and business)? Texas’ generous exemption scheme can protect a significant portion of your personal assets in a Chapter 7 case. However, business assets are generally not exempt from liquidation in a Chapter 7.
• What is the overall financial health of the business? If the business has a viable path to recovery and can generate sufficient revenue to support a repayment plan, then Chapter 11 could be a suitable option.

Don’t Navigate Bankruptcy Alone

We trust this post has clarified the distinctions between personal and business bankruptcy. Bankruptcy is a complex legal matter, and the most appropriate path for you will depend on your specific circumstances.

If you are facing financial hardship and are unsure which type of bankruptcy best suits your needs, consulting with an experienced bankruptcy attorney is vital. The skilled legal team at Warren & Migliaccio, L.L.P. can provide comprehensive guidance throughout the process. We understand the financial and emotional stress that often accompanies bankruptcy, and our dedicated team is committed to helping you navigate this challenging situation with compassion and expertise.

Schedule a Free Consultation

To discuss your unique situation and explore your options, contact Warren & Migliaccio, L.L.P. for a free consultation. Call us at (888) 584-9614 or visit our website to schedule an appointment. We have helped tens of thousands of people just like you to find a way out of debt.