Types of Bankruptcy

There are several types of bankruptcy, each is addressed in a separate chapter of the federal Bankruptcy Code.Chapter 7 and chapter 13 are the two types which are available for individual consumers. Chapter 9 involves bankruptcies filed by cities and towns. Chapter 12 deals with the special cases of family farmers. Chapter 11, Also called reorganization, is used primarily by commercial businesses that are restricting or liquidating while containing operations. While an individual not engaged in business may file for chapter 11 bankruptcy, such proceedings are expensive and complex.

Proceeding’s under chapter 7 involve the borrower surrendering most of his or her nonexempt assets (if any) and distributing them to the creditors or proceeds from liquidating (selling) them. However, some assets are exempt depending upon specific federal law.

The purpose of filing a chapter 7 case is to obtain a discharge of your existing debts. If, however, you are found to have committed certain kinds of improper conduct described in the Bankruptcy Code, the court may deny your discharge and, if it does, the purpose for which you filed the bankruptcy petition will be defeated.

Even if you receive a general discharge, some particular debts are not discharged under the law. Therefore, you may still be responsible for most taxes and student loans; debts incurred to pay non-dischargeable taxes; domestic support and property settlement obligations; most fines, penalties, forfeitures, and criminal restitution obligations; certain debts which are not properly listed in your bankruptcy papers; and debts for death or personal injury caused by operating a motor vehicle, vessel, or aircraft while intoxicated from alcohol or drugs. Also, if a creditor can prove that a debt arose from fraud, breach of fiduciary duty, or theft, or from a willful and malicious injury, the bankruptcy court may determine that the debt is not discharged.

Under chapter 13 (so-called wage-earner bankruptcy), proceedings require the debtor to propose a repayment plan to pay back his or her debt. This is usually carried over a 3 to 5 year period. This is based upon his or her future income.

Ordinarily you cannot discharge debts such as fines, penalties imposed for violating the law such as court fees and restitution, student loans, child support alimony, property settlement, fraudulent debts, personal injury or death, or recent income tax debts, in general, the new law narrows the requirements for chapter 13 discharge.

Only farmers and fishermen acting in good faith have the right to adjust their debt under chapter 12. In order for a petition to proceed quickly, the debtor must submit to the bankruptcy court a list of creditors, a list of assets and liabilities, and a statement of financial affairs.

The consequences of having a bankruptcy on your credit record can be severe. Creditors may deny your credit in the future or charge you significantly higher interest rates. This may cause you to have future credit difficulties. But there is also a chance that bankruptcy may improve your chance for credit.

The Laws Defining Bankruptcy

There are six laws which govern bankruptcy filings. Three of these laws (Chapter 9, Chapter 12 and Chapter 15) are very limited in scope.Chapters 7 and 13 relate to individuals and Chapter 11 is reserved for
businesses.

Chapter 9 bankruptcy relates soles to Municipalities. A municipality is defined as a political subdivision, public agency or instrumentality of a State. This section protects a distressed municipality from its creditors and allows for time to reorganize. There is no provision for liquidating the assets of a municipality.

The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 created a new bankruptcy law, Chapter 15. With the increase of multinational corporations, this law was enacted to provide an effective system to handle bankruptcy cases involving debtors or creditors residing or
incorporated in more than one country.

Family Farmers and Family Fisherman can file under Chapter 12 protection. This law was enacted because of the uniqueness and importance of fishermen and farmers. Due to the high level of debt related to these two businesses, fishermen and farmers could be ineligible for bankruptcy protection under individual bankruptcy laws.

Individuals can file for bankruptcy under either Chapter 7 or Chapter 13. The pre-filing requirements for individual bankruptcy includes meeting with an approved credit counseling agency.

The simplest form of bankruptcy is Chapter 7, which is also referred to as liquidation. There is often only one trip to the courthouse. A fresh start is given to the individual by eliminating their debt. This chapter is limited to people who really do not have the ability to pay their debt.The income test is extremely restrictive. Chapter 7 filers usually have very few if any non exempt assets.

Chapter 13 bankruptcy is sometimes referred to as reorganization bankruptcy. The purpose of this section is to allow individuals and small proprietary business owners (not corporations) who have the ability to pay off at least a substantial amount of their debt, time to make the payments. These individuals need the protection of the bankruptcy court. People filing under Chapter 13 typically have non-exempt property they prefer to keep along with stable and regular monthly income. They can pay normal monthly living expenses and still contribute towards their debt repayment plan. Chapter 13 Bankruptcy usually lasts from 3 – 5 years.

Chapter 11 bankruptcy is also used to reorganize business, but may include acorporation, sole proprietorship, or partnership. A corporation exists separate and apart from its owners, the stockholders. In this case, the chapter 11 bankruptcy case of corporation does not put the personal assets of the stockholders at risk other than with the value of their investment in the company’s stock. A sole proprietorship (owner as debtor) does not have an identity separate and distant from its owners. Accordingly, a bankruptcy case involving a sole proprietorship includes both the business and personal assets of the owners-debtors.

Chappter 12 Bankruptcy

If you are a farmer or a fisherman and have major financial problems, you might be eligible to file bankruptcy under Chapter 12.To be considered a Family Farmer or Family Fisherman you must have a steady income stream from one of those industries. Chapter 12 Bankruptcy is designed to protect those with a family history in the farming or fishing business. Their debt is usually too high to qualify under Chapter 13.and Chapter 11 is more suited for large corporations.

To qualify under Chapter 12 you must be an individual engaged in either a farming or fishing operation with more than 50% of the gross income for the last three years resulting from the farming or fishing operation. Maximum total debt cannot exceed $3,237,000 (farming) or $1,500,000 ((fishing). Also the percentage of total debt related to the business operation must be at least 50% for farming or 80% if in the fishing business.

Partnerships or corporation can file under Chapter 12 if they meet the following criteria:

o More than half the stock must be owned by one family (including relatives). The stock cannot be publicly traded.
o The family must be personally managing the operation.
o At least 80% of the value of the corporation must be related to farming or fishing.
o Total debt and its relationship to total debt are the same as for an individual – farming $3,237,000 and 50%; fishing – or $1,500,000 and 80%.

To complete the form, you will need the following information

o List of creditors, amounts owed and nature of their claims
o Debtors source and amount of income.
o List of all property owned
o Detailed list of farming/fishing expenses

If you are married, you must include this information for your spouse even if the spouse is not included in this petition.

The trustee will hold meetings of your creditors after you file your petition. The debtor is placed under oath and is questioned by both the trustee and creditors concerning his debt and repayment plan.

The official repayment plan must be filed within 90 days after filing the petition. The plan must include full payment for priority claims (i.e.: taxes) and secured creditors must be guaranteed value at least equal to the value of the collateral that was pledged. The unsecured creditor must receive at least as much cash as they would have received if the debtor’s nonexempt assets were sold under either a Chapter 7 or Chapter 11 filing.

Unsecured creditors must file a claim with the court within 90 days after the meeting of the creditors in order to collect from the distribution. The court charges a filing fee as of October 2005 of $239.

If you can be classified legally as a Family Farmer or Family Fisherman, Chapter 12 Bankruptcy can hold significant advantages over Chapter 7 or Chapter 12 Bankruptcy. The choice is yours.

What You Should Know About Chapter 13 Bankruptcy

If you have a job or regular income, Chapter 13 Bankruptcy could be for you. It was enacted for individuals and small proprietary business owners (not corporations) who have the ability to pay off at least a substantial amount of their debt, but need the protection of the bankruptcy court and a significant amount of time to make the payments. It is sometimes referred to as reorganization bankruptcy. People filing under Chapter 13 typically have non-exempt property they prefer to retain, and have stable and regular monthly income to pay normal expenses and can still contribute towards debt repayment, Chapter 13 bankruptcy will allow to pay them to pay their remaining debt over a period of 3 -5 years and begin anew.

Part of the pre-filing requirements is a meeting with an approved credit counseling agency. You must complete an instructional course to assist you with financial management including budgeting. This is important because the courts will often require you to submit a proposed budget to see if you can satisfy the financial requirements of the payment plan. You must be a resident of the state you are filing for bankruptcy protection for at least 90 days prior to filing.

The maximum allowable total debt for filing Chapter 13 is $922,975 and unsecured debt (such as credit card and personal loans) must be less than $307,675. Certain debt cannot be included in Chapter 13 Bankruptcy including child support, alimony, educational loans, criminal fines and restitution ordered by the courts,

Your repayment plan is a legal agreement between you and your creditors. You guarantee to pay based on a monthly payment schedule and your creditors will forgive a portion of your debts. The court usually appoints a trustee to receive your payments and distribute to your creditors. As long as you continue to make your monthly payments, creditors included in the agreement are unable to commence any collection action against you.

While under Chapter 13 protection, you cannot incur additional (new) debt greater than $250.00 unless you obtain court approval. This could affect you if you need a student loans or a car lease.

After you file you bankruptcy petition, the court will usually issue an order prohibiting from collecting any portion of their debt from you, seizing property such as your car or commencing any continuing legal against you.

Following the filing of your petition and pay the $274 filing fee, you have 15 days to file the financial schedules with the court detailing your assets, liabilities, expenses and income along with your repayment plan.

You MUST make your first payment within 30 days after your plan was filed or the judge can dismiss your case. Approximately 6 weeks after your case is filed, their will be a Meeting with your Creditors chaired by the trustee. You must attend and testify to the accuracy of statements in your bankruptcy request The creditors have 30 days after this meeting to file objections to any of your exemption claims. The judge will hold a hearing judge approximately 45 days after the Meeting with the Creditors with the trustee. This will be the last chance for your creditors to state their objections. Your creditors have 90 days after the Meeting of your Creditors to submit legal documents to the court to prove their claims. All payments must be made within 5 years from the date of your initial payment.

Understanding Bankruptcy in Business

Bankruptcy in Business is much different than for an individual.Many businesses use bankruptcy as a means to “buy time” in order to reorganize into a profitable business. This leads to the first question which must be answered – Can the business be saved?

Businesses can potentially qualify to file for bankruptcy under Chapter 7, 11, 12 or 13. The cause of the financial problems of the company will help you decide which bankruptcy Chapter to file under.

Chapter 12 and Chapter 13 are extremely limited for businesses.Chapter 12 is restricted to individuals or in some cases businesses which meet the definition of Family Farmer or Family Fisherman. Chapter 13 is limited to small proprietary business owners. Therefore, most business will be limited to filing under either Chapter 7 or Chapter 11.

Is your business a viable enterprise? Is there a market for your product or service? Can revenues grow enough to support your expense base?Do you just need to “buy some time” or, is it time to liquidate the business.

If you don’t believe the business can be saved, you should file under Chapter 7 Bankruptcy. This is the simplest form of bankruptcy. Chapter 7 is also referred to as a liquidation proceeding. The court appointed trustee will sell all non exempt assets and distribute the cash to the creditors based in order as established by the federal bank codes.This provides an orderly liquidation of assets without any additional expense to the shareholders.

The advantage of Chapter 7 Bankruptcy for the creditors is that they
will be paid to the maximum value of the assets available for sale and in
the legal priority of their claims. The management of the company
could be liable for taxes. The liquidation proceedings guarantee that the
cash raised, after the expenses of the Chapter 7, go to pay taxes
first.

If you believe the business can and should be saved, Chapter 11 Bankruptcy is probably best for your business. This bankruptcy act revolves around the preparation, confirmation, and implementation of a plan.Management continues to run business and tries to become profitable again.All significant business decisions must be approved by the bankruptcy court.Many large companies including K-Mart, WorldCom, and Enron used Chapter 11 to reorganize. Some have been successful, some have not.

After filing a Chapter petition there is an immediate and automatic stay which stops creditors from taking any further action to try to collect their debts.

One of the differences between personal bankruptcy and filing bankruptcy for a business is that the debts are not discharged. In some cases, a sole proprietor can be entitled to having their debt discharged. Bankruptcy in business is much more complicated than most individual bankruptcies. It is important to get sound advice form professionals.