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Advice & Information for Those Considering Bankruptcy- Part 1

Every day we are forced to make decisions.  Often, making these decisions is not something we want to do, but rather something we are forced to do.  In the current economy, the decision to declare bankruptcy (chapter 11 bankruptcy) is an unpleasant decision that many Americans have been forced to make.  Though no one wants to declare bankruptcy, in certain circumstances it is the right decision to make and can help get you back on your financial feet.

Bankruptcy is not a decision one makes lightly.  It can have lasting effects and must be made with careful planning and consideration.  Once you have decided to look into bankruptcy as an option, the first step is to do thorough research so you know exactly what to expect in terms of benefits, cost, potential adverse effects, etc.  Fortunately in the information age, there are plenty of resources to help you make an informed decision concerning bankruptcy.

Financial planners can help you decide if filing bankruptcy is the best course of action in your situation.  If they believe you can benefit from bankruptcy, they will also help you analyze you situation and decide the best chapter under which to file.  They will consider your debts, assets, income etc. to help you make a decision as to whether bankruptcy is the right move for you and if so which type.

Once you have a plan, the next step is to consult an attorney.  In some circumstances if you have relatively few assets and your debts are strait forward, you can successfully file for bankruptcy without an attorney.  However, in most cases the attorney will be very helpful if not absolutely necessary.  If you have substantial assets, are filing Chapter 11 bankruptcy or owe sizeable debts to the IRS, a specialized bankruptcy attorney will be essential if you want the best outcome as possible in your proceedings.  Paperwork alone can overwhelm most people and hours will be spent filling out complicated forms.  Attorneys and their assistants do this all the time and can complete paperwork quickly and accurately.

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Your Options under Chapter 11

After one makes the critical decision to file for bankruptcy, they must next decide under what chapter of bankruptcy law they will file.  This decision is at least as important as the decision to file in the first place.  The wrong decision can lead to unnecessary costs and headaches that choosing to file under another chapter could have avoided.

For corporations, the decision is often quite easy.  They have the option to either restructure under Chapter 11 or to liquidate the company under Chapter 7.  Chapter 13 isn’t available to corporations.  They base this decision on their perceived ability to bounce back from financial trouble.

Individuals face a slightly tougher decision and may choose from Chapters 7, 11, and 13.  While a corporation can simply sell off its assets and fade away into the night, individuals must go on living and thus must choose very carefully.  Both Chapter 11 and Chapter 13 deal with restructuring one’s debt instead of having to sell off all of one’s assets.  What then would make Chapter 11 more beneficial to an individual than Chapter 13?

A person’s total amount of debt is the first factor.  There is a maximum debt limit for eligibility under Chapter 13.  Though most individuals will never come close to this limit, some do.  As inflation rises faster than bankruptcy law statutory limits, this becomes more and more common.  For instance in California, with its previously super high real estate prices and an equally extreme decline in their value over the last 2 years, many individuals are upside down on their mortgage and own substantially more than their home is worth.  That coupled with credit card, medical and other debts can easily put an individual over the limit for Chapter 13 eligibility.

Under Chapter 13, a trustee is automatically appointed to oversee one’s finances.  Many people are averse to this and choose Chapter 11 which allows one to maintain control of their finances as long as they prove to the court that they are making progress in repaying debts.

On the down side, Chapter 11 generally costs much more than Chapter 13 and requires extensive paperwork.  A bankruptcy attorney is often required just to complete the necessary paperwork that must be filed, adding to the overall expense.  Court costs are also higher in Chapter 11 cases.

Though Chapter 11 does offer some unique advantages over Chapter 13, great care should be taken to match one’s individual circumstances to the correct type of bankruptcy.  Bankruptcy can be a solution to one’s financial problems, but under no circumstance would you want to make things worse by choosing incorrectly.

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Chapter 7 and Chapter 11 Bankruptcy: A Comparison

The stagnant U.S. economy has led to the loss of millions of jobs and left many Americans in a financial crisis.  Many people who didn’t lose their homes in the initial round and in danger of losing them now due to unemployment.  Many Americans have exhausted all of their options and are looking for a way to salvage their lives.  For many of these people, their only viable option is bankruptcy.

Thousands of businesses, large and small alike have also found themselves unable to pay their bills.  They too are faced will the necessity of filing bankruptcy.

Having decided that bankruptcy is the best or the only option, a person or business next must decide what type of bankruptcy they will file.  The two most common types are Chapter 7 bankruptcy and Chapter 11 Bankruptcy.   Both types will help debtors recover, but there are important differences that must be considered before making a decision.

The biggest difference between Chapter 7 and Chapter 11 bankruptcies is how repayment of creditors is handled.  In Chapter 7, a person’s of business’s property is liquidated and the revenue used to pay the creditors.  Creditors are repaid according to the type of debt they hold.  Creditors holding debts secured with collateral are first to be repaid, either by retaking possession of the collateral, from proceeds of the liquidation, or a combination of both.  The remaining proceeds from the liquidation then go to remaining creditors.  When the proceeds are exhausted, most of the remaining debts are discharged.

In Chapter 11 Bankruptcy, assets are not necessarily liquidated.  Instead, the person or business filing bankruptcy is given a chance to reorganize their finances and/or operations.  They then present the plan to their creditors and if approved, they continue to operate under the supervision of the court, and begin to pay off creditors.  Once again, secured debt is paid first followed by other debt classified into categories.

Businesses that have substantial assets will generally choose Chapter 11 unless they absolutely cannot foresee any hope of recovery.  Chapter 11 is generally viewed as not only beneficial to the business, but also to the creditors and the economy.  If a company continues to operate, creditors are much more likely to be repaid and employees keep their jobs.  For individuals, unless they have substantial assets, chapter 11 offers very little advantage.

Most individuals forced to file bankruptcy have very little in the form of assets and thus liquidation is usually the best option.  Certain assets are protected and the person is allowed to keep possession of them.  These include a home, certain household items viewed as necessities and sometimes an automobile.  If the person owns little or nothing else of value, then most of the remaining debt is discharged and the person is free to start over.

One should keep in mind that bankruptcy law is very complicated and this is a very brief overview.  Anyone considering bankruptcy should speak to an attorney specializing in bankruptcy proceedings and get advice on the best course of action for their particular situation.

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A Brief Explanation of Chapter 11 Bankruptcy

The last two years have seen several of America’s largest companies file for bankruptcy.  General Motors, Chrysler, Washington Mutual, CIT Group and many others have found themselves unable to meet creditor’s demands and have been left with no other option but to declare bankruptcy.  Some of these companies such as GM and Chrysler continue to operate while others were forced to liquidate and no longer exist.  The one thing they have in common is their filing of Chapter 11 bankruptcy.

Who Can File

A chapter 11 bankruptcy, often called reorganization bankruptcy, is the type most commonly used by large corporations, partnerships and businesses.  Small businesses and individuals are also allowed to file Chapter 11, but are usually advised to file under another chapter more beneficial to their situation.  Under Chapter 11, corporations are allowed to maintain control of its assets and are allowed to operate under the supervision of the court.

The Plan

Once Chapter 11 paperwork is filed, the corporation presents a reorganization plan.  Its creditors vote on whether the plan is acceptable.  If the plan is confirmed, the corporation continues to operate and pay off the creditors.  If not, the creditors can ask the court to order the liquidation of the corporation.

The Committee

The court appoints a committee made up of the 20 largest creditors of unsecured debt which represents all creditors having a claim.  This committee monitors the corporation’s implementation of the plan and its progress.  If the court decides that the corporation isn’t managing the reorganization effectively, it can appoint a trustee to oversee the process, though this is very rare.

Automatic Stay

Immediately upon the filing of bankruptcy, the court issues an automatic stay which protects the filer and the filer’s assets from collection attempts by creditors.  Creditors are allowed to petition the court to order the corporation to liquidate assets under Chapter 7, but the court will only do this if they believe that liquidation is in the best interest of all creditors involved.  Often the corporation willingly liquidates some of its assets without being ordered by the court since it will likely receive more for the assets than it would with forced liquidation under Chapter 7.

Cancellation of Contracts

A corporation that files Chapter 11 can be given relief from contracts if the court believes doing so would benefit the corporation and its ability to repay creditors.  Often, labor union contracts, leases on real estate and contracts with suppliers can be cancelled without repercussions.

Who Gets Paid

The corporation’s creditors are divided into classes according to their priority in being repaid.  Creditors with secured debt generally are repaid first, followed by suppliers and employees and finally other creditors with unsecured debt.  The corporation must first pay off all creditors in a particular class before beginning to repay creditors in the next class.

By allowing a corporation to continue to operate instead of dissolving and liquidating its assets, the corporation hopefully can recover and repay its creditors.  Though Chapter 11 has its critics, a corporation’s recovery is usually the best outcome for all involved.

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