What You Should Know About Bankruptcy In Puerto Rico

In 2021 Puerto Rico’s debt was estimated to be around $74 billion, which is a significant burden for a territory with a population of about 3.2 million people. Puerto Rico’s debt crisis has been building for several years, driven in part by factors such as a shrinking economy, high poverty rates, and a history of borrowing to finance government operations. In 2015, the territory’s governor declared that the debt was unpayable, and a few years later, Puerto Rico filed for bankruptcy under Title III of the Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA).

Individuals in Puerto Rico can file for bankruptcy under two different chapters of the bankruptcy code:

1. Chapter 7: This is known as a “liquidation” bankruptcy, and it involves the sale of non-exempt assets to pay off creditors. In a Chapter 7 bankruptcy, most debts are discharged (meaning they are erased), although certain types of debts (such as student loans and taxes) are generally not dischargeable. To qualify for Chapter 7 bankruptcy, the individual must pass a means test that determines whether their income is low enough to qualify for this type of bankruptcy.
2. Chapter 13: This is known as a “reorganization” bankruptcy, and it involves the individual creating a payment plan to repay creditors over a period of three to five years. In a Chapter 13 bankruptcy, the individual generally gets to keep their assets, but they must have a regular source of income to be able to make the payments. At the end of the payment plan, most remaining debts are discharged.

Businesses in Puerto Rico can file for bankruptcy under two different chapters of the bankruptcy code:

1. Chapter 7: This bankruptcy involves the sale of the business’s assets to pay off creditors. In a Chapter 7 bankruptcy, most debts are discharged, although certain types of debts (such as tax debts) are generally not dischargeable. Once the assets are sold, the business is dissolved and ceases to exist.
2. Chapter 11: This bankruptcy involves the business creating a plan to restructure its debts and operations. In a Chapter 11 bankruptcy, the business continues to operate while it works out a plan to repay creditors over a period of several years. Once the plan is approved, the business continues to operate under court supervision. At the end of the payment plan, most remaining debts are discharged.

Learn More about the 3 main types of bankruptcy

Considering Business Bankruptcy? Things You Should Keep In Mind

If you’re considering filing for business bankruptcy in Puerto Rico, here are some important things to keep in mind:

1. Explore all options: Bankruptcy should be a last resort, so before filing, explore all other options for resolving your business’s financial difficulties, such as negotiating with creditors, seeking financing, or selling assets.
2. Consult with a bankruptcy attorney: Bankruptcy laws can be complex, and the specific rules and procedures for each type of bankruptcy can vary depending on the circumstances of your business. A qualified bankruptcy attorney can help you understand your options and navigate the process.
3. Understand the implications: Filing for bankruptcy can have significant implications for your business, including the loss of assets, damage to your credit rating, and potential legal action by creditors. It’s important to understand these implications and weigh the pros and cons before deciding to file.
4. Choose the right type of bankruptcy: As I mentioned earlier, there are different types of bankruptcy available for businesses, each with its own advantages and disadvantages. Consider which type of bankruptcy is most appropriate for your business’s specific circumstances.
5. Be prepared to work with the court: If you file for bankruptcy, you’ll need to work with the court-appointed trustee and comply with court orders. It’s important to be prepared for this process and be willing to work collaboratively to resolve your business’s financial difficulties.

Are All Debts Included In Bankruptcy?

While bankruptcy can provide relief for many types of debts, not all debts can be discharged through bankruptcy. Here are some common types of debts that are typically not dischargeable in bankruptcy:

1. Student loans: In most cases, student loan debts are not dischargeable in bankruptcy unless the debtor can prove that repaying the debt would cause an undue hardship.
2. Taxes: Certain types of taxes, such as income taxes, may be dischargeable if certain conditions are met (such as the taxes being at least three years old and the debtor having filed a tax return). However, other types of taxes, such as payroll taxes, are generally not dischargeable.
3. Child support and alimony: Debts related to child support and alimony payments are generally not dischargeable in bankruptcy.
4. Debts arising from fraud or intentional wrongdoing: If a debtor incurs a debt through fraud, embezzlement, or other intentional wrongdoing, that debt may not be dischargeable in bankruptcy.
5. Debts owed to the government: Debts owed to the government, such as fines or penalties, are typically not dischargeable in bankruptcy.

How Bankruptcy In Puerto Rico Affects Your Credit Score And Future Eligibility For A Loan?

Filing for bankruptcy in Puerto Rico can have a significant impact on your credit score and your future ability to take out a loan. When you file for bankruptcy, it will appear on your credit report for up to 10 years, which can make it difficult to obtain credit or loans in the future. In addition, your credit score may drop significantly, which can make it harder to qualify for credit and loans at reasonable interest rates.

How Does Bankruptcy In Puerto Rico Affect Tax Debt?

Bankruptcy in Puerto Rico can affect tax debts in several ways, depending on the type of tax debt and the type of bankruptcy filed. In general, most tax debts are not dischargeable in bankruptcy, which means that the debtor will still owe the taxes after the bankruptcy is completed. However, there are some exceptions.

Under Chapter 7 bankruptcy, tax debts can be discharged if they meet certain criteria, including:

• The tax debt must be at least three years old
• The tax return for the debt must have been filed at least two years prior to filing for bankruptcy
• The tax assessment must be at least 240 days old

Under Chapter 11 and Chapter 13 bankruptcy, tax debts can be included in a repayment plan, which allows the debtor to pay off the tax debt over a period of time. The debtor must continue to make timely payments under the plan in order to avoid further penalties and interest charges.

It’s important to note that bankruptcy does not necessarily relieve the debtor of all tax obligations. For example, if a debtor has not filed tax returns for several years, filing for bankruptcy will not relieve them of the obligation to file those returns and pay any resulting taxes.

What Happens To Your Assets In Bankruptcy In Puerto Rico?

Whether or not you will lose your assets in bankruptcy in Puerto Rico depends on the type of bankruptcy you file and the specific circumstances of your case. Under Chapter 7 bankruptcy, the debtor’s assets are liquidated to pay off creditors, but there are exemptions that can be used to protect certain assets from being sold. Puerto Rico has its own set of exemptions that may be available to debtors filing for bankruptcy. Under Chapter 13 bankruptcy, the debtor is not required to sell their assets to pay off creditors. Instead, the debtor creates a repayment plan to pay off debts over a period of three to five years. Under Chapter 11 bankruptcy, the debtor is allowed to continue operating their business while restructuring debts, which may involve selling assets. It’s important to note that exemptions may not cover all assets, and some assets may not be exempt at all. In addition, secured debts (such as a mortgage or car loan) may not be dischargeable through bankruptcy, and the creditor may be able to take possession of the collateral if the debtor is unable to make payments.

Statute Of Limitations For Collections In Puerto Rico

In Puerto Rico, the statute of limitations for collections depends on the type of debt. Here are some common types of debts and their corresponding statute of limitations:

1. Oral contracts: 15 years
2. Written contracts: 20 years
3. Promissory notes: 20 years
4. Open accounts: 5 years
5. Judgments: 20 years

It’s important to note that the statute of limitations refers to the time period during which a creditor can legally sue a debtor to collect a debt. Once the statute of limitations has expired, the creditor can no longer sue the debtor for that debt. However, the expiration of the statute of limitations does not necessarily mean that the debt is forgiven or that the creditor cannot continue to attempt to collect the debt through other means, such as phone calls or letters. It’s also possible for the debtor to reset the statute of limitations by making a payment or acknowledging the debt in writing.

Explore The Pros And Cons Associated With Bankruptcy

While bankruptcy in Puerto Rico can offer a fresh start to individuals and businesses struggling with debt, there are also several cons to consider. Here are some potential drawbacks of bankruptcy:

1. Damage to credit score: Filing for bankruptcy can have a significant negative impact on your credit score, which can make it more difficult to obtain credit or loans in the future.
2. Public record: Bankruptcy filings are public record, which means that anyone can access information about your bankruptcy.
3. Loss of assets: Depending on the type of bankruptcy filed and the specific circumstances of the case, the debtor may be required to sell some or all of their assets to pay off creditors.
4. Legal and filing fees: Filing for bankruptcy can be expensive, as there are legal and filing fees associated with the process.
5. Impact on business operations: For businesses, bankruptcy can disrupt operations and damage relationships with suppliers and customers.
6. Possible tax consequences: Filing for bankruptcy can have tax consequences, as forgiven debt may be considered taxable income.

Compare the Pros and Cons of Bankruptcy: Pros and Cons of Filing Bankruptcy

Will You Regret Filing For Bankruptcy?

While bankruptcy can be a helpful tool for individuals and businesses struggling with debt, there are a few reasons why some people may regret filing for bankruptcy. Here are some common reasons:

1. Damage to credit score: Filing for bankruptcy can have a significant negative impact on your credit score, which can make it more difficult to obtain credit or loans in the future.
2. Loss of assets: Depending on the type of bankruptcy filed and the specific circumstances of the case, the debtor may be required to sell some or all of their assets to pay off creditors. This can be particularly challenging for individuals who have a strong attachment to their possessions.
3. Public record: Bankruptcy filings are public record, which means that anyone can access information about your bankruptcy. This can be embarrassing or uncomfortable for some individuals.
4. Emotional toll: Filing for bankruptcy can be emotionally difficult, as it can feel like a failure or a personal setback. It may also involve significant stress and anxiety related to the legal process.
5. Impact on relationships: Filing for bankruptcy can have an impact on personal relationships, particularly if money was owed to friends or family members. It can also damage business relationships, as suppliers and customers may be wary of working with a business that has filed for bankruptcy.

What Are The Alternatives To Bankruptcy?

If you do not qualify for bankruptcy in Puerto Rico, there may be other options available to you to help address your debt issues. One of which is debt settlement. Debt settlement involves negotiating with creditors to settle debts for less than the full amount owed.

There are some potential benefits to debt settlement over bankruptcy that may make it a more favorable option for some individuals.

1. No BK on your credit report: Filing for bankruptcy shows on your credit report for up to 10 years. On the other hand, debt settlement does not show as a bankruptcy.
2. Cost: Filing for bankruptcy can be expensive, with filing fees, attorney fees, and other costs adding up quickly.
3. Emotional Impact: People report horror stories of the negative emotional impact of BK.
4. With a bankruptcy for the rest of their life: Employers or lenders can ask if someone has filed BK for the rest of their life. It is much less likely to be asked if one ever used debt settlement to pay back an agreed to amount.
5. Control: With debt settlement, you may have more control over the process and negotiations with your creditors, whereas with bankruptcy, a court will make the final decision.
6. Less severe consequences: Filing for bankruptcy can have significant consequences, such as the liquidation of your assets, whereas debt settlement may allow you to negotiate a more manageable repayment plan while keeping your assets.

Bankruptcy vs. Debt Relief: What’s Right For You and How We May Be Able To Help

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