Bankruptcy is a legal vehicle that provides relief to individuals and businesses in serious financial trouble and protects their creditors to the extent possible. Generally, the bankruptcy process assesses the debtor’s assets and liabilities and provides a structure within which the debtor is allowed to keep some property and ordered to satisfy as many eligible debts as possible, according to an order of priority established by law. Remaining debts are discharged, except those of certain types, like domestic support orders, debt obtained by fraud and most tax debt.
The traditional stigma of bankruptcy has faded and been replaced by the view that it is a fresh start after a time of trouble. Most bankruptcy debtors have experienced unexpected and extreme financial shock, such as that caused by sudden events such as job loss, business failure, death, divorce or illness.
In such cases, filing bankruptcy may be the right answer. If you are facing serious financial challenges, it is very important to seek the counsel of an experienced bankruptcy attorney to help you to assess your legal options.
Bankruptcy law is primarily federal and administered by the federal courts. However, the various states’ consumer and commercial laws do play important roles in certain bankruptcy issues and some circumstances.
Bankruptcy is an available option for individual consumers, businesses, farmers and municipalities. There are two major bankruptcy types: liquidation and reorganization. Since the imposition of means testing by bankruptcy reform in 2005, only relatively low-income and less stable debtors are allowed to liquidate. For practical purposes, many of these debtors have so-called no-asset cases where all of the debtors’ property is exempt from the liquidation requirement and eligible debt is discharged without any property being sold.
Chapter 7 of the Bankruptcy Code governs liquidation bankruptcy, available to individuals and businesses. Upon the filing of a Chapter 7 bankruptcy petition, the bankruptcy court issues an “automatic stay” that stops most collection proceedings against the debtor. A bankruptcy trustee is responsible for gathering the debtor’s nonexempt property, if any, liquidating it and distributing the proceeds to the creditors in order of legal preference. This process often leaves some creditors’ debts unpaid when there are not enough assets to cover liabilities.
For an individual consumer debtor, these remaining debts are discharged and no longer the responsibility of the debtor; however, certain types of debt are nondischargeable and survive the bankruptcy, such as alimony or child support. For a business debtor, the liquidated business does not survive the bankruptcy.
A reorganization bankruptcy is more appropriate where there is ongoing income that can be used to pay creditors, at least in part. Reorganizations are governed by several chapters of the Bankruptcy Code. Chapter 11 generally controls reorganizations for individual debtors with high debts or for larger business entities. Chapter 13, on the other hand, generally covers individual consumer debtors with lower debts. Farmers can file for reorganization under Chapter 12 and municipalities under Chapter 9.
Filing for reorganization also generates an automatic stay of most collection activity. The debtor then develops a repayment plan to pay debts over a three- to five-year period through a bankruptcy trustee. At the successful conclusion of the payment plan, if certain conditions are met, remaining dischargeable debt is cancelled. If the debtor fails to make payments under the plan or fails to make alimony, child support or certain tax payments, however, the court may either dismiss the case or convert the reorganization to liquidation.
In addition to bankruptcies filed voluntarily by debtors, creditors have a legal remedy through “involuntary bankruptcy” petitions under Chapters 7 or 11. If either a minimum level of debt is present or a minimum number of creditors, creditors can file a bankruptcy petition against a debtor to ensure that assets are distributed fairly among creditors through the bankruptcy process. Creditors must take care only to file meritorious involuntary petitions, however. Penalties for filing improper involuntary petitions can be steep.
Bankruptcy law can benefit debtors and creditors alike, depending on the circumstances. If you feel that a bankruptcy proceeding may benefit you or your business, you should consult a skilled bankruptcy attorney to help determine your best course of action. Experienced bankruptcy attorneys have the knowledge to help their debtor clients get out from under formidable debt and to assist their creditor clients in collecting what is rightfully theirs.
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