Bankruptcy Basics: Chapter 7, 11 and 13 Bankruptcy Filings
By Kenday S Kamara
Many botched bankruptcy transactions can be traced to the fact that it is important to hire an attorney because of the complexities involved in bankruptcy proceedings. Individuals and businesses that don't seek legal counsel to guide them through the maze of legal complexities - pre- and post-bankruptcy - increase their chances of becoming one of those botched bankruptcy filings. It is a fitting advice to individuals and businesses that they can learn lessons from successful bankruptcy transactions, from failed transactions, from any transaction. All raise different challenges. The goals of the Bankruptcy System are clear. A fundamental goal of the federal bankruptcy laws enacted by Congress is to give "the honest but unfortunate" debtors a financial "fresh start" from burdensome debts and a "clear field for future effort". In experts' view, each successful bankruptcy filing has two common traits: a thorough legal strategy and attention to core discipline and transitional risk.
Individuals and businesses that steer their way through a successful bankruptcy process keep their eyes peeled for such relief opportunities from burdensome debts as a matter of getting a financial 'fresh start'. As the experts have put it, bankruptcy is a generalized term for a federal court procedure, a legal process that is designed to help consumers and businesses get that 'fresh start' by relieving them of burdensome debts, but you as the filer typically has to prove that you are entitled to it.
Failure in a bankruptcy transaction is often created by the lack of a disciplined approach which constitutes proper attorney representation. Among the different types of bankruptcies, Chapter 7, Chapter 11, and Chapter 13 proceedings being the most common for individuals and businesses, the do-it-yourself approach does not cut it as a legal strategy. Chapter 7 bankruptcy normally falls in the liquidation category. This means that if you own property, it could be taken and sold in the process of liquidation in order to pay back your debts. However, as a benefit of this type of bankruptcy proceeding, any unsecured debts (debts that are not guaranteed by collateral, such as credit card debts) can be forgiven in Chapter 7. But things like child support, taxes that are due, and alimony payments cannot be wiped out.
Chapter 11 bankruptcy is intended primarily for the reorganization of businesses with heavy debt burdens, most often associated with corporations but available to small businesses as well. Consumers may file for Chapter 11 in some rare instances. "Chapter 11 allows the debtor to propose a plan for profitability post-bankruptcy, which may include trimming costs and seeking new sources of revenue or income, while temporarily holding creditors at bay". In contrast, Chapter 7 bankruptcy often involves liquidation of debtor's assets to repay creditors. Chapter 11 therefore has certain advantages for those that qualify with the opportunity of putting a plan in place to restructure and reorganize, which however, could be more time consuming and little more costly than other forms of bankruptcy filing.
Chapter 13 bankruptcies also offers reorganization opportunities and those that qualify for Chapter 13 bankruptcy filing are probably be able to keep their property, but must submit and stick to a time-sensitive repayment plan (generally, three to five years).
Core Discipline and Transitional Risk
Experts familiar with bankruptcy proceedings say they like their clients to think about a bankruptcy strategy as a core discipline and a transitional risk that needs to be professionally managed. It can't just be 'let's go out and file a bankruptcy.' You can't cut corners in the bankruptcy process. It's always best to discuss your options with a seasoned business bankruptcy legal professional familiar with every legal ramification from Chapter 7 and Chapter 11 to Chapter 13 bankruptcy procedures before making a decision.
Chapter 11 bankruptcy which governs the process of reorganization of a debtor is generally associated with larger corporations but it is available to qualifying small businesses. Small businesses with fewer than 500 employees, as defined by the Small Business Administration, have a chance with Chapter 11 bankruptcy. Bankruptcy courts, however, are stricter over small business Chapter 11 filings than for larger entities, and there are stipulations in place which include the requirement to report on a small business profitability and projected cash receipts and disbursements because the ability of a small business to reorganize effectively is crucial to the actions being considered by the court. Again, following the 1991 U.S. Supreme Court case Toibb v. Radloff, it is upheld that non-business, individual consumers can also file for Chapter 11 bankruptcy. It's quite an unusual strategy but it's a strategy that can be pursued by individuals who still have substantial personal earning potential but whose debts exceed the limits set forth by Chapter 7 and Chapter 13. Experts at FindLaw say that "a typical non-business Chapter 11 bankruptcy filer might be a celebrity who just got in over his or her head with bad investments but who conceivably still has earning potential through product endorsements, for example". Generally, Chapter 11 bankruptcy is considered more debtor-friendly than other types of bankruptcy. When the bankruptcy court is on your side, it can "cram down" certain forms of debt and can push through a repayment plan over the objections of some creditors.
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Page Updated 3:03 PM Thursday 9/11/2014