Bankruptcy FAQs

Chapter 7 and Chapter 13 Bankruptcy

Bankruptcy law provides two basic forms of relief: (1) liquidation and (2) rehabilitation or reorganization. Most bankruptcies filed in the United States involve liquidation, which is governed by Chapter 7 of the Bankruptcy Code. A reorganization or rehabilitation bankruptcy under Chapter 11 (business) or 13 (consumer) of the Bankruptcy Code is, however, the option often preferred by the courts. In a reorganization bankruptcy, creditors may have better opportunity to recoup what they are owed.

Chapter 13 has certain advantages over Chapter 7 in consumer bankruptcies. The biggest advantage for many people is that Chapter 13 allows individuals the opportunity to keep their homes and avoid foreclosure. Chapter 13 also permits individuals to reschedule secured debts and extend them over the life of the bankruptcy plan. In addition, Chapter 13 allows the debtor to discharge more types of debts than Chapter 7 does.

Further, under Chapter 7, the court may order that the consumer's nonexempt assets be sold, whereas under Chapter 13 the debtor may be able to retain more of his or her assets. A consumer's choice between Chapter 7 and Chapter 13 is not necessarily the last word; once bankruptcy proceedings have begun, a case may be converted to a different chapter. Once converted, however, in some situations and some jurisdictions the court may not allow the case to be converted back again.

A consumer may choose bankruptcy under Chapter 13 if he or she has a stable income, believes the financial crisis is temporary and wants to repay at least some debt. To be eligible for Chapter 13, however, the debtor must have less than a certain amount of debt as periodically determined by the Judicial Conference of the United States. For example, as of April 1, 2010, the upper debt limits were $360,475 in unsecured debt and $1,081,400 in secured debt.

Chapter 13 generally applies to individual consumers with smaller debts. Corporations and partnerships cannot file under Chapter 13, but self-employed individuals and those who own unincorporated businesses are eligible for Chapter 13. If the debtor is an individual with extremely large debts in excess of the Chapter 13 dollar limits or is a corporation, Chapter 11 reorganization is generally available. Farmers can file under Chapter 12, which provides for reorganization, and municipalities may file for Chapter 9 reorganization.

Experienced bankruptcy attorneys have the knowledge to help clients get out from under formidable debt and emerge as productive citizens, and can advise debtors about whether Chapter 13 is the right course of action given their particular circumstances. Contact our firm to schedule an appointment with an experienced bankruptcy attorney.

What Is Commercial Bankruptcy?

Like a consumer, a business sometimes finds itself in the uncomfortable position of being unable to pay its debts. One solution is to file for bankruptcy, a legal process in federal bankruptcy court that releases the business from the obligation to pay all or some of its debts.

Bankruptcy Choices for Small Businesses

Businesses must choose among alternative types of bankruptcies, each of which corresponds to a different chapter of the federal Bankruptcy Code. Businesses usually choose either Chapter 7 or Chapter 11, or occasionally may be eligible for Chapter 13. Sometimes businesses can be involuntary drawn into bankruptcy by their creditors, who face stiff financial penalties if they initiate an involuntary bankruptcy for invalid reasons.

Chapter 7

Chapter 7 bankruptcies are called liquidation bankruptcies. Chapter 7 is usually employed by consumer debtors, but can also be used by businesses that want to liquidate their assets to be relieved of debt. A Chapter 7 bankruptcy is commenced when the business files a petition with the bankruptcy court. The court then orders an automatic stay of all collection action against the business and its property. A court-appointed trustee manages the details of the bankruptcy, selling business assets to satisfy business debt, to the extent possible. At the conclusion of the proceeding, remaining debts of the business are not discharged as with an individual debtor, but generally the business ceases to exist because its assets are gone and it is no longer a profitable concern.

Chapter 11

In Chapter 11 bankruptcies, which are usually filed by businesses and rarely by individuals, the commercial debtor is usually allowed to stay in business throughout the bankruptcy proceedings. A business debtor may only operate independently in its ordinary course; transactions outside the ordinary course of business require court approval.

A Chapter 11 proceeding, like one under Chapter 7, is initiated by filing a petition, but a trustee is not automatically appointed. Although the bankruptcy judge may decide to appoint a trustee in a Chapter 11 case, it is the exception rather than the rule. As in Chapter 7, the filing of the bankruptcy petition stops creditors from attempting to collect their debts.

Although liquidation is a possibility, the debtor usually files a proposed plan of reorganization. The plan of reorganization sets forth in detail how the debtor intends to conduct its business, while continuing to make payments to its creditors. In some situations, creditors may also propose plans of reorganization. Creditors are divided into classes with varying rights depending upon the types of debt they hold. The approval process involves negotiation and input from creditors. Ultimately, a plan must be approved by the court. In some cases, the court approves the plan even though some of the creditors did not. If no plan is approved, however, the bankruptcy may be converted to Chapter 7 liquidation or may be dismissed.

The choice between Chapter 7 and Chapter 11 is not necessarily permanent; once proceedings have begun, a case may be converted to a different chapter, under certain circumstances.

Bankruptcy may not be the best option for every business, but sometimes it is the best choice a business owner can make. Alternatives to bankruptcy include working informally with creditors toward a repayment plan or assigning assets for the benefit of creditors. A lawyer experienced in bankruptcy law can advise a business about whether bankruptcy better meets its needs than other options.

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DISCLAIMER: This site and any information contained herein are intended for informational purposes only and should not be construed as legal advice. Seek competent counsel for advice on any legal matter.

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