Bankruptcy

The United States Constitution gives its citizens the basic right to bankruptcy protections. Article I of the Constitution gave Congress the right to make bankruptcy laws for the protection of citizens. The resulting laws are contained in Chapter 11 of the United States Code. The bankruptcy code is in place to assist citizens facing financial difficulties. These constitutionally mandated laws are in place to give citizens protection when necessary to protect the livelihood of themselves and their families.

Bankruptcy proceedings generally fall under one of two basic categories. One type of bankruptcy is liquidation. The second type is known as reorganization. For individuals considering a bankruptcy, most initially inquire about a chapter 7. A chapter 7 is a liquidation bankruptcy process whereby most debts may be eliminated. However, the debtors must give up any non-exempt assets in exchange for eliminating most of their debts. The other type of bankruptcy, reorganization, may be a better option to many debtors. One of the primary advantages to reorganization is that a debtor, under certain circumstances may keep even non-exempt assets. Chapters 11 and 12 are also reorganizations which generally apply to businesses. Chapter 13 reorganization will apply to individuals and married couples.

A common misconception is that the option of filing liquidation or a reorganization is elective. Prior to the bankruptcy reform act of 2005, this may have been the case in many circumstances. However, under the bankruptcy reform act of 2005, which imposed a series of complex rules, known as means tests, it greatly limited the number of consumers who were able to file for liquidation. For any type of bankruptcy, bankruptcy laws are in place in order to allow people to have a fresh start.

Stopping Foreclosures

If you are a new homeowner facing a foreclosure, either a Chapter 7 or a Chapter 13 bankruptcy filing can be a powerful tool in helping you save your home.

Chapter 7

How Does Chapter 7 Bankruptcy Work?

A trustee is appointed who collects all non-exempt property, sells the assets, and distributes proceeds from this sale to appropriate creditors. Chapter 7 is different from other bankruptcy filings because the debtor does not make a payment to the trustee.

Even though in some cases this would mean that you will lose all your assets, this is not always the case. It is strongly recommended that if you are apprehensive and feel you will lose your assets, discuss the matter with your bankruptcy attorney.

Under Chapter 7 Bankruptcy, the debtor receives a discharge on all dischargeable debts. There are 19 general classes of debt, such as child support, most taxes, and student loans that are discharged under Chapter 7 Bankruptcy.

An added advantage with Chapter 7 bankruptcy is that by signing a reaffirmation agreement, a debtor can continue to pay for a car loan or a mortgage on their home. This agreement is in place because as per the US Government Bankruptcy Code, a debtor could be allowed to retain some or all of his property.

Who Can File For A Chapter 7 Bankruptcy?

The reverse of this question would be more appropriate to answer. Debtors engaged in business would usually not like the prospects of liquidation, and Chapter 11 might be a better option for such individuals associated with corporations and partnerships. Also, individuals in a debt situation with regular income would be better suited to file a Chapter 13 Bankruptcy.

Also, any person who has been granted a Chapter 7 discharge (or completed a Chapter 13 plan) within the last 8 years, cannot file for a Chapter 7 bankruptcy plan.

How Do I File For A Chapter 7 Bankruptcy?

Filing for bankruptcy is the fulfillment of a clearly laid of set of rules and procedures, but it is as complex as it seems simple. You need to be sure about just one thing: “Do you need to file for bankruptcy?” Contact us as soon as possible and we will work with you to ensure that Chapter 7 bankruptcy is your best option and in your best interest.

Chapter 13

What Is Chapter 13 Bankruptcy?

When someone files for bankruptcy under Chapter 13 of the Bankruptcy Code, their aim is to have the opportunity to repay some or all the debts in their name, in better terms, i.e. lower or no interest. Unlike Chapter 7 which involves liquidation of assets, this process involves restructuring debts which allows the debtor to use whatever income they may have in the future to pay off the creditors. Filing Chapter 13 Bankruptcy is thus applicable for a debtor who has a regular income, and thus can afford to request for such adjustments or reductions.

The United States Bankruptcy Code gives the debtor a ceiling of 5 years, within which the creditors must be paid back. While the attorney will safeguard your interests, the entire process is carried out under the supervision of the courts.

How Does Chapter 13 Bankruptcy Work?

While debtors are allowed to keep all of their property, the court approves a new interest-free plan for repayment. A written plan is created giving details of all the transactions that will occur, and the duration of the same. The repayment must begin within thirty to forty-five days after the case has started. The transitory stage of paying a trustee, who then pays a creditor, as in Chapter 7 Bankruptcy is, usually eliminated with Chapter 13 Bankruptcy. Although, in some cases, people may involve a trustee, who would take care of disbursing money to the creditors. Also, as per the law, the creditors must strictly adhere to the repayment plan approved by the court and are in fact prohibited to collect any claims from the debtor. Your attorney will prepare new repayment plan to best suit your situation.

The one advantage of Chapter 13 over Chapter 7 Bankruptcy is the full discharge option which is not applicable under Chapter 7 filing. For example, if a debtor manages to complete all necessary payments in the plan, he or she is given a full plan discharge. (There are a few exceptions to this case, which your attorney will guide you through if necessary.) Yet another advantage of the Chapter 13 filing is that a repayment can be created even if creditors disagree with it, as long as it is approved by the Court. Although, in all fairness, the court allows creditors to also file an objection.

Who Can File For Chapter 13 Bankruptcy?

The most important criterion for a person to be able to file for Chapter 13 Bankruptcy is that the individual must have a regular income. There are a few other criterions that must be met for filing a Chapter 13 Bankruptcy, and your attorney will be the best person to introduce you to these.

How Can I File For Chapter 13 Bankruptcy?

We will ensure that you do not need to be burdened by trying to understand the complicated details of this answer.

• Determine whether Chapter 13 is the best solution for you.
• Prepare a budget.
• Examine individual cases to figure out whether a filing of Chapter 13 bankruptcy is required, or can be tackled in some other way.
• Determine and implement methods of dealing with secured creditors.
• Devise a chapter 13 plan, and fill out the forms.
• Pay the filing fee and complete the process of filing the forms and pleadings.
• Attend whatever meetings you may be required to attend, such as with creditors, court hearings, etc.
• Obtain a discharge once the payments have all been made, and the plan terminated.

Business Reorganizations

What Happens to the Company?

Federal bankruptcy laws govern how companies go out of business or recover from crippling debt. A bankrupt company, the “debtor,” might use Chapter 11 of the Bankruptcy Code to “reorganize” its business and try to become profitable again. Management continues to run the day-to-day business operations but all significant business decisions must be approved by a bankruptcy court.

Under Chapter 7, the company stops all operations and goes completely out of business. A trustee is appointed to “liquidate” (sell) the company’s assets and the money is used to pay off the debt, which may include debts to creditors and investors.

The investors who take the least risk are paid first. For example, secured creditors take less risk because the credit that they extend is usually backed by collateral, such as a mortgage or other assets of the company. They know they will get paid first if the company declares bankruptcy.

Bondholders have a greater potential for recovering their losses than stockholders, because bonds represent the debt of the company and the company has agreed to pay bondholders interest and to return their principal. Stockholders own the company, and take greater risk. They could make more money if the company does well, but they could lose money if the company does poorly. The owners are last in line to be repaid if the company fails. Bankruptcy laws determine the order of payment.

Why Would a Company Choose Chapter 11?

Most publicly-held companies will file under Chapter 11 rather than Chapter 7 because they can still run their business and control the bankruptcy process. Chapter 11 provides a process for rehabilitating the company’s faltering business. Sometimes the company successfully works out a plan to return to profitability; sometimes, in the end, it liquidates. Under Chapter 11 reorganization, a company usually keeps doing business and its stock and bonds may continue to trade in the securities markets. Since they still trade, the company must continue to file SEC reports with information about significant developments. For example, when a company declares bankruptcy, or has other significant corporate changes, they must report it within 15 days on the SEC’s Form 8-K.

How Does Chapter 11 Work?

The U.S. Trustee, the bankruptcy arm of the Justice Department, will appoint one or more committees to represent the interests of creditors and stockholders in working with the company to develop a plan of reorganization to get out of debt. The plan must be accepted by the creditors, bondholders, and stockholders, and confirmed by the court. However, even if creditors or stockholders vote to reject the plan, the court can disregard the vote and still confirm the plan if it finds that the plan treats creditors and stockholders fairly. Once the plan is confirmed, another more detailed report must be filed with the SEC on Form 8-K. This report must contain a summary of the plan, but sometimes a copy of the complete plan is attached.

Who Develops the Reorganization Plan for the Company?

Committees of creditors and stockholders negotiate a plan with the company to relieve the company from repaying part of its debt so that the company can try to get back on its feet.

• One committee that must be formed is called the “official committee of unsecured creditors.” They represent all unsecured creditors, including bondholders. The “indenture trustee,” often a bank hired by the company when it originally issued a bond, may sit on the committee.
• An additional official committee may sometimes be appointed to represent stockholders.
• The U.S. Trustee may appoint another committee to represent a distinct class of creditors, such as secured creditors, employees or subordinated bondholders.

After the committees work with the company to develop a plan, the bankruptcy court must find that it legally complies with the Bankruptcy Code before the plan can be implemented. This process is known as plan confirmation and is usually completed in a few months.

Steps in Development of the Plan:

• The debtor company develops a plan with committees.
• Company prepares a disclosure statement and reorganization plan and files it with the court.
• SEC reviews the disclosure statement to be sure it is complete.
• Creditors (and sometimes the stockholders) vote on the plan.
• Court confirms the plan, and
• Company carries out the plan by distributing the securities or payments called for by the plan.