You have been serving as a legal/financial advisor to a family of small business owners who operate under several different company structures in the retail business. There are five active members of the family running four different companies. The family members have all accumulated a significant amount of personal wealth, averaging about $750,000 each. The family members have used two of the four companies which have been incorporated to accumulate significant debt. The equity in the two corporations is in the RED (negative), and the family members are transferring additional debts into these corporations. The family is considering further such debt transfer, and then filing Bankruptcy to try and unload the total family and business debts. As their lead Legal/Financial Advisor, the family members have ask you to define the three Chapters of the Bankruptcy Code, Chapters 13, 11, and then 7, and then recommend which one they should pursue. They also tell you to advise them on any risk they may incur in shifting debt and possibly funds among themselves personally, and between themselves and the two corporations that are absorbing the debt in preparation for the Bankruptcy Filing.
Filing Chapter 7 bankruptcy relieves the debtors of making plans for repayment. However, property may be seized, and sold, to settle liens.
Filing Chapter 11 bankruptcy is contingent upon two points. First, those declaring bankruptcy, under Chapter, must not have had a petition dismissed under the following circumstances: within the last 180 days they refused to comply with court-ordered conditions; or, there was a voluntary dismissal due to the lien-holder recovering their property, in order to dismiss the debt. Another stipulation of Chapter 11 is that, within the last 180 days, the creditors have sought counseling from an accredited credit counselor. This may have been in either an individual or a group setting.
Filing Chapter 13 bankruptcy is favored when debtors seek a 3 - 5 year repayment debt for their liens. A repayment plan is based upon the individual’s median income, with 3 years being the preferred repayment period. This plan also forbids creditors from pursuing collection activities.
Given that the family members seem to have chosen to sacrifice the two failing venues, in order to enhance the remaining two, the more attractive plan would be to file Chapter 7. Though they risk losing the assets of the two companies, they would be free from collection activities. The losses they incur would be those of two already "sinking ships."
A chapter 13 is for individuals to reorganize and repay debt. Chapter 11 does the same thing for businesses. Chapter 7 is a straight liquidation. Couple of problems with the family's plan. First is the look back period for fraud or preferential treatment of assets and debt. The look back period can be significant (as in years) where the bankruptcy trustee can analyze and void transfers or preferential payments to preferred creditors. So the gymnastics with the finances may be a waste of effort. But second business debt is often co-signed by the individual shareholders and also is secured not only by business assets but by the co-signers personal assets like their homes. Though debts can be discharged in bankruptcy liens generally cannot be.