Bankruptcy Information Center

Bankruptcy - An Overview

In general, bankruptcy involves a creditor and a debtor. Either the debtor wishes to discharge the debts owed or to reorganize the debt into a plan that would allow for the continuation of a business enterprise. If debtor wishes to resolve debt by creating a payment plan with their creditors, a plan is created, supervised and administered by a Bankruptcy Court through the assignment of a United States Trustee. The trustee supervises the assets of the debtor.

The primary purpose of bankruptcy is to deal with debts that cannot be paid immediately, ever, or without some sort of court-monitored plan. Either an individual or business debtor will initiate bankruptcy. In rare cases, a creditor will initiate a bankruptcy proceeding so as to secure some form of payment or a plan that has judicial approval.

There is a general order of priority in regard to which creditors get paid. Secured creditors (those creditors who have a security or interest in the form of collateral) are often paid first. Unsecured creditors are next. Stockholders generally have the last claim on assets. Depending on the nature and extent of debt, a debtor may be able to continue running their business. It is at this point that the debtor will choose a type of bankruptcy in which to proceed.

Federal law governs bankruptcy proceedings, however, state law governs some aspects of a creditor/debtor relationship. The proceedings are within the United States District Courts and are governed by Title 11 of the United States Code.

If you are considering filing for bankruptcy you should consult an attorney. Bankruptcy lawyers are an excellent resource for this information.

Chapter 7

The most common type of bankruptcy proceeding is a Chapter 7 filing. A Chapter 7 filing involves the liquidation (sale) of the debtor's non-exempt property and using the proceeds to satisfy debt. A trustee is assigned by the court to administer and supervise the liquidation of assets and determining all applicable liabilities. There is some property that is exempt from liquidation under a Chapter 7 filing.

For example, tools of trade and some equity in a home or car could possibly be exempt. State law that tracks and affords more protection than federal law to the debtor can also be utilized. For instance, there are some states that allow for a homestead exemption. It should also be noted that there are certain liabilities that are not exempt. Examples would be child support, student loans and taxes. These debts would not be discharged in a Chapter 7 proceeding.

Chapter 13

The next most common type of bankruptcy proceeding is one filed under Chapter 13. What distinguishes a Chapter 13 bankruptcy filing from a Chapter 7 filing is the manner of repayment. A Chapter 13 filing allows a debtor to develop, with their creditors, a periodic repayment plan. This allows the debtor to repay the debt without having to liquidate a business or major assets. The drawback to the Chapter 13 filing is that it could extend the repayment over an indefinite period of time. The debtor and the creditor can vote on the repayment plan, however, the bankruptcy court can disregard the plan agreed upon and substitute it with one that the court may feel is more equitable or reasonable. To qualify for a Chapter 13 filing, the debtor must have either less than $871,550 in secured debt or less than $269,250 in unsecured debt.

Chapters 11 and 12

Filing either Chapter 11 or 12 is also an option for a business that is holding a large amount of debt that cannot be easily or immediately paid off. Chapter 11 is a more complex form of Chapter 13 that is often used by large publicly owned companies. Chapter 11 would also be a choice for a business whose debt exceeds the statutory maximums of Chapter 13 mentioned above. It offers the same option as Chapter 11 to devise a repayment plan. Chapter 12 is designed for individual or corporate farming operations with real estate debt. The farm will still operate and a periodic repayment plan will be created.

Conclusion

Filing for bankruptcy can involve a number of delicate considerations including, but not limited to, the future viability of the company and any considerations as to profitability. If there is a negligible chance that the company will bounce back from bankruptcy the option of Chapter 7 filing should be considered. However, if the company is viable and there is a safe level of risk as to long-term profitability, then a restructuring of debt under Chapters 11 and 13 may be considered. A bankruptcy attorney can prepare you for success.