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THERE ARE TWO TYPES OF BANKRUPTCY: (1) LIQUIDATION & (2) REORGANIZATION

The following described bankruptcies for individuals and for businesses.

LIQUIDATION FOR INDIVIDUALS

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Individuals who reside, have a place of business, or own property in the United States may file for bankruptcy in a federal court under Chapter 7 (“straight bankruptcy”, or liquidation).

In a Chapter 7 bankruptcy, the individual is allowed to keep certain exempt property.

Liens secured against property, such as a house or car, survive the liquidation. If the debtor wants to keep the secured property they must pay at least the value. The non-exempt assets, if any, are sold (liquidated) by the trustee and those funds used to repay creditors. Most unsecured debts (such as credit cards) are discharged by the bankruptcy proceeding.

Some debts are considered to so important that Congress decided those debts were non-dischargeable.

Common exceptions to discharge include child support, alimony, income taxes less than 3 years old and property taxes, most student loans and fines and restitution imposed by a court for any crimes committed by the debtor.

The law requires that all debts must be listed on bankruptcy schedules, even if not dischargeable.

The law also requires that the debtor list all assets in their schedules. Failure to do so can result in a criminal referral to the Department of Justice for prosecution.

Fully secured creditors will retain their lien against the collateral.

The secured creditor may seek a court order allowing them to repossess the secured collateral (house or car). Fully secured creditors are not entitled to participate in any distribution of liquidated assets that the bankruptcy trustee might make.


Frequently Asked Questions about a Chapter 7

Can I keep My House If I File Bankruptcy?

What Happens to Student Loans in Bankruptcy?

REORGANIZATION FOR INDIVIDUALS

CHAPTERS 13 and 11

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Yes, there is a lot of paperwork in a bankruptcy – a minimum of 80 pages. One form alone is 60+ pages.

The Debtors file documents called Petition, Schedules, Statement of Affairs, along with some other documents with the Bankruptcy Court.

These documents are reviewed by the Chapter 13 Trustee and other creditors. In addition to the documents the Debtors also file a Plan of Reorganization. This is called debt adjustment. The intention is that over the next 3 to 5 years the Debtors will pay all the disposable income (income minus allowed expenses- some trustee have expense guidelines and Census Bureau and IRS Data) to their creditors by way of the Bankruptcy Trustee. At the end of their Plan period their remaining debts will be discharged, unless they are non-dischargeable.

Chapter 13 varies widely from district to district depending on the custom and attitudes of the local trustees and judges about what is “reasonable” and in “good faith”.

A successful Chapter 13 case always requires an experienced bankruptcy lawyer familiar with the prevailing judicial attitudes in the district and the myriad of unwritten local rules. The failure rate is over 98% for those who try their chapter 13 case without an attorney (this is the Bankruptcy Court’s statistics, not mine).


Frequently Asked Questions about Chapter 13

Why Chapter 13 Bankruptcy Can Be Doomed for Failure

Difference Between Chapter 7 and Chapter 13

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REORGANIZATION FOR BUSINESSES
Chapters 9, 11 & 15

Reorganizations:

  • Chapter 9 (municipality)

  • Chapter 11 (business)

  • Chapter 15 (cross border bankruptcy)

Unlike liquidation, reorganization provides the business debtor with an opportunity to retain continue to operate the business and retain assets it would lose in a chapter 7.

In return, the debtor must agree to pay debts in strict accordance with a Reorganization Plan approved by the bankruptcy court. During this repayment period, creditors are unable to pursue debts beyond the provisions of the reorganization plan. This gives the debtor the chance to restructure affairs in the effort to meet financial obligations.

Reorganizations can be used to strip wholly unsecured mortgages on land or to pay the fair market value of property.

This allows the debtor to keep property and pay the fair market value rather than the entire amount of the secured debt. There are some exceptions. The debtor can surrender property to the lender or landlord.

To be eligible for a reorganization bankruptcy, the debtor must have sufficient income to make a reorganization plan feasible.

If the debtor fails to comply with the reorganization plan, the bankruptcy court may order liquidation.  A debtor who successfully completes the reorganization plan is entitled to a discharge of remaining debts. In keeping with the general preference for bankruptcy rehabilitation rather than liquidation, the goal of this policy is to reward the conscientious debtor who works to help creditors by resolving his or her debts.

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