The bankruptcy process in the United States is regulated by federal bankruptcy code. This means the process is the same, legally speaking, in all 50 states, Washington D.C., Puerto Rico and all other commonwealths and territories. Local states can make additional protections and unique property exemptions.
Various states also may have different statutes of limitation for old debt and rules for repossession, but a bankruptcy filing and its automatic protections use the same system and documents from Maine to Florida. State law will also determine how long you must be a resident before you can file.
This post is written by a Philadelphia Bankruptcy attorney to set forth the bankruptcy types in PA and also throughout the country.
The Most Common Bankruptcy Types in PA Explained
From 31 March 2018 to 31 March 2019, 772,646 bankruptcies were filed under all applicable chapters of the bankruptcy code.
- Chapter 7 was the most common relief sought. Last year, 62% of bankruptcies, being 477,106 cases, were filed as Chapter 7s.
- With 288,038 cases filed, Chapter 13 was a distant second. That is 37% of all bankruptcies filed from 2018-2019.
- Just 6,891 Chapter 11 cases were filed, 0.8% of all national cases.
- Chapters 9 and 12 were not reported individually, but made up 610 “other chapter” filings.
These statistics can be broken down further into business and personal bankruptcies. It is interesting to note that while other options are available, individuals and corporate filers chose to pursue Chapter 7 bankruptcy at the same rate.
National Statistics for Business Bankruptcies
The majority of bankruptcy filings were individual or joint personal bankruptcies. Businesses accounted for 22,157 cases of bankruptcy last year, or just 2% of all cases.
When businesses did file for bankruptcy, they choose to pursue Chapter 7 asset liquidation at the exact same rate (62%) as personal filers.
Just over a quarter (26%) of businesses chose to pursue a Chapter 11 restructuring when filing for bankruptcy.
National Statistics for Personal Bankruptcies
In the past year, 750,489 cases of personal bankruptcy were filed. This number includes individuals and joint filings.
Of these cases, 463,000 were filed as Chapter 7 bankruptcies and 286,230 were filed as a Chapter 13 case, where the debtor enters a repayment plan.
1,039 cases were filed as Chapter 11 bankruptcies, which apply to large land holdings and unsecured debts in excess of the Chapter 13 caps, currently $419,275 for unsecured debts and $1,257,850 in secured debt.
Bankruptcy Enforcement Statistics
The Department of Justice’s U.S. Trustee Program is tasked with the administration of laws relating to abuse of the bankruptcy system. They protect both debtors and creditors from abuse and fraud in the bankruptcy system.
Their most recent public report was for Fiscal Year 2016. Some of the numbers are surprising!
Despite the appeal of easily discharging debts, there was shockingly little abuse of the bankruptcy system
Out of 764,214 cases filed in FY 2016:
- Just 3,155 bankruptcies (0.41%) were dismissed for fraud or abuse in FY2016.
- Only 1,176 (0.15%) bankruptcy discharges were denied for fraud or abuse.
- 136 cases were converted to another chapter of bankruptcy.
Presumed Abuse in Bankruptcy
Bankruptcy guidelines create a presumption of abuse when disposable monthly income is above a certain level. For FY2016, the threshold was $214.17 for an individual.
In every case where a debtor exceeds the threshold, the U.S. Trustee Program had to decide whether to move to dismiss the case.
Of all cases flagged as abusive in 2016, the Department of Justice allowed 63% to proceed uncontested. It was noted that in most cases, attorneys were clearly working within known exemptions.
Their official report shows several sample cases where they did move to dismiss–like a teacher claiming thousands of dollars in housecleaning expenses per month or a millionaire gifting $60,000 worth of automobiles to close family in the month before filing.
The Common Types of Bankruptcy
Chapter 7 Bankruptcy: Asset Liquidation
Chapter 7 is by far the most common relief sought through bankruptcy. There are a series of tests, based on income and the level of debt, meant to keep individuals from abusing the system, but these are not a problem for the majority of debtors who file bankruptcy.
A bankruptcy attorney can often protect most, if not all, of a debtor’s personal property through bankruptcy exemptions. Any non-exempt property will pass into the possession of a trustee.
This trustee will liquidate assets as necessary to satisfy liens, then distribute the remaining assets to creditors, equitably and according to federal guidelines. Some creditors will be paid in full, some in part, often, some are paid nothing at all.
Once the bankruptcy estate has been exhausted of assets, a discharge will be granted to the debtor. This discharge will absolve the debtor of responsibility for any outstanding debts, and creditors will not be allowed to begin or resume collection actions on the discharged debts.
Of all the bankruptcy options in PA, Chapter 7 is the most common. Chapter 7 bankruptcy allows honest but unfortunate debtors to get a “fresh start.”
Chapter 13: Reorganization and Repayment
The second most commonly filed, as shown above, Chapter 13 bankruptcy has long been held out as the preferred means of saving a home when suffering from crushing debt and potential foreclosure. While a person qualifies for Chapter 7 based on their income and obligations, the so-called “means test,” there are hard limits for how much debt can be restructured through Chapter 13. This is intended to prevent high-income individuals and corporations from abusing the bankruptcy system.
The Average Chapter 13 Filer
The Minnesota Law Review published a comprehensive study on the demographics of Chapter 13 filers and how they influenced the success for failure of a repayment plan. Here are some key takeaways:
- 74% of Chapter 13 filers were homeowners.
- Most Chapter 13 filers had children.
- 80% of filers have a high school diploma or some college, but no degree.
- 65% of filers would be in affordable housing if their debts were discharged.
- The average debtor had $35,000 in unsecured debt (credit cards, medical bills, etc.).
- The average debtor owed $119,000 on secured debts (homes, automobiles, motorcycles etc.).
These numbers suggest a caricature of the average Chapter 13 filer, largely working and middle class families trying to save their homes. Most of the time their home is at risk because of other debts, not the cost of the home itself. If these debts are payed down and discharged, nearly 2/3rds of Chapter 13 filers would be in affordable housing.
There are, of course, the outliers–the other 25% of Chapter 13 seekers, each with their own reasons for seeking a repayment plan instead of a Chapter 7 discharge.
Chapter 11: Debt Modification and Reorganization
Chapter 11 bankruptcy is designed to allow creditors and debtors to work together towards the creation of a plan to pay off debts in the federally mandated priority. Businesses receive their discharge soon after creditors have voted to approve the proposed restructuring, while individuals must complete their repayment plan in full to receive their discharge.
These bankruptcies are typically thought of as a solution for businesses, but almost a third of Chapter 11 filings are made by individuals whose debts and circumstances do not fit within the limits and tools of Chapter 7 or Chapter 13 relief.
Why Individuals File Chapter 11 Bankruptcy
Why do thousands of individuals, nearly half (46%) of whom technically qualify to file a Chapter 13 bankruptcy, choose to file Chapter 11? While there is limited research available on individuals filing Chapter 11, the available numbers allow for some valuable insights:
- On average, it takes 208 days for individual Chapter 11 filers to pitch their first plan to creditors.
- Chapter 11 plans take an average of 450 days, and as long as 930 days, to confirm with creditors.
- Personal Chapter 11 plans are approved at nearly the same rate (33% vs. 35%) as business plans.
- On average, 33% of personal Chapter 11 cases succeed to discharge. The rate is higher for married couples and those retaining a lawyer, lower for single filers, and in the single digits for those who chose to self-represent.
- More than two-thirds (68%) of those seeking personal Chapter 11 relief had never filed bankruptcy before.
- The average monthly income of a Chapter 11 filer is $8,600 to $11,700 dollars.
- 36% of Chapter 11 filers were in the top 20% of households by income.
- 15% of Chapter 11 filers were in the top 5% of households by income.
In the “average” consumer bankruptcy, where the majority of debt comes from credit cards and a home or auto loan, establishing a repayment plan is straightforward. But when an individual is tied up in a complicated financial arrangement, especially with real estate holdings, it may not even be possible to get the required paperwork done in 14 days, let alone to write an entire repayment plan.
Chapter 11 plans are also far more flexible in their restructuring of debts, often allowing a mortgage to be restructured on a 30 year plan. Many individuals seeking Chapter 11 relief are also very high income individuals, and their comparatively high debts might disqualify them from seeking other forms of bankruptcy.
Other Bankruptcy Types: Chapter 9, Chapter 12, and Chapter 15.
Chapters 7, 11, and 13 are types of personal bankruptcy, with Chapter 11 also available for businesses. The following chapters are much more rare.
What is Chapter 9 Bankruptcy?
Chapter 9 bankruptcies are extremely rare. They are a special restructuring meant for entire towns, municipalities, school districts, and other public entities which are insolvent.
From FY2008 to FY2015, during some of the worst years of the financial crisis, the Northeast United States only saw 8 cases filed; 3 in Pennsylvania, 3 in New York, and 2 in Rhode Island. In many states, no municipality has ever tried to file Chapter 9 on its debts.
Infamous cases of public mismanagement ending in a Chapter 9 filings include Detroit, the largest city to ever go bankrupt, and Orange County, California. Harrisburg, Pennsylvania’s state capital, tried to file Chapter 9 but had its case dismissed in late 2011.
What is Chapter 12 Bankruptcy?
Chapter 12 bankruptcies number in the hundreds every year, with the American Farm Bureau Federation tracking 468 cases in FY2018, down 8% from FY2017.
Chapter 12 is meant to allow small family farms and fisheries to keep their land and farm equipment while restructuring the farm’s debt and has some special protections, but is otherwise similar to a normal business restructuring.
What is Chapter 15 Bankruptcy?
Chapter 15 is the least used and least well-known chapter of the United States’ bankruptcy protections. Chapter 15 allows foreign companies who operate in the US to enjoy American bankruptcy protections while restructuring in their native courts. There are typically under a hundred Chapter 15 filings in any given fiscal year.
These cases usually extend an automatic stay or some other temporary relief so that the business can keep operating on US soil until its restructuring has been settled with creditors. In 2017, Italian airline Alitalia used a Chapter 15 filing to keep its leased terminal at JFK Airport while the Italian government proceeded with a $600 million dollar bailout of its flag carrier.
Do You Need Debt Relief in PA?
If you are overwhelmed with debt, come in and talk with The Law Offices of David M. Offen. Our bankruptcy attorneys can analyze your unique financial situation and help you determine whether Chapter 7, Chapter 13, or some alternative to bankruptcy is appropriate for you. Contact us to schedule your free consultation. We look forward to working with you and helping you achieve your fresh start.