Chapter 12 Bankruptcy And Unsecured Debt

There are many advantages allowed for Family Farmers and Fisherman under the Chapter 12 bankruptcy rules. Chapter 12 is a debt reorganization filing that is very similar to the Chapter 13 designation, but it contains some very important differences. One of the most important to understand is how unsecured debt is treated and what qualifies as unsecured debt under Chapter 12 bankruptcy.

Chapter 12 and 13 bankruptcy filings are designed for people and businesses that exceed the income and asset limits of the Chapter 7 filing. Both 12 and 13 allow for a debt reorganization of payments to lessen the burden of debt but to allow the debt to be honored and not discharged. This allows businesses to retain more of their operation assets to continue functioning and also clears the bankruptcy filing off of your record in 7 years. Under Chapter 7, the potential for losing the assets necessary to run a business are great and the judgment remains on your credit report for up to 10 years.

Unsecured debt is put through a process called the “best interest test.” The interest examined is that of the creditor. While it would seem that it would be in their best interest to have the full debt remain in force, if the reality of repayment is low or a proposed reorganized payment would be so low as to be negligible, the debt may be liquidated under the guidelines of the Chapter 7 bankruptcy. For the debtor, this means that unsecured debt may be paid off for pennies on the dollar. For the creditor, it is considered to be in their best interest to accept the liquidation payment. Hiring a trucking accident attorney can help you get equivalent payment for damages you have acquired.

When assessing what unsecured debt you have that may benefit from this “best interest test,” it is important to be very clear about the terms and conditions of the original agreement. It is not uncommon for typically unsecured debt associated with bank and credit lines to have secured portions detailed within their terms and agreements. The secured debt may take the form of using any items purchased with the credit line as collateral. Before assuming that a total debt amount is unsecured, review the terms and conditions completely. Keep in mind that while it may be in the best interest of that creditor to receive a liquidation payment on the unsecured aspects of the debt, a portion of it may require payment through liquidation of associated collateral that may be necessary for the operation of your business.