Liquidation for Individuals
In a Chapter 7 bankruptcy, an individual is entitled to keep some items known as exempt property.
Liens on real estate, such as a house or a car, survive the liquidation. If the debtor wishes to maintain the secured property, he or she must pay at least the current market value. If there are any significant non-exempt assets, the trustee sells them (liquidates them) and uses the proceeds to repay creditors. The bankruptcy discharges the majority of unsecured obligations (such as credit cards).
Some debts are considered so significant by Congress that they are not dischargeable.
Child support, alimony, income taxes less than three years old and property taxes, most student loans, and fines and restitution imposed by a court for any crimes committed by the debtor are all common exceptions to discharge.
Even if a debt is not dischargeable, the law requires that it be listed on a bankruptcy schedule.
In addition, the law mandates the debtor to list all of their assets in their schedules. Failure to do so may result in criminal charges being brought by the Department of Justice.
Unless a court order is issued, fully secured creditors will keep their claim on the collateral.
The secured creditor may apply for a court order permitting them to seize the secured collateral (house or car). Fully secured creditors have no right to share in any liquidated asset distributions made by the bankruptcy trustee.
Reorganizations for Individuals
Chapters 13 and 11
Petition, Schedules, Statement of Affairs, and other documents are required to be filed with the Bankruptcy Court by the debtors.
The Chapter 13 Trustee and other creditors examine these documents. The Debtors also file a Plan of Reorganization in addition to the filings. The plan is for the Debtors to pay all of their disposable income (income minus authorized expenses-some trustees have expense guidelines and Census Bureau and IRS data) to their creditors through the Bankruptcy Trustee over the next 3 to 5 years. Unless their debts are non-dischargeable, their remaining debts will be discharged at the end of their Plan period.
Chapter 13 varies greatly from district to district, based on local customs and opinions regarding what is “fair” and in “good faith” by local trustees and judges.
A successful Chapter 13 case always necessitates the assistance of an experienced bankruptcy attorney who is knowledgeable with the district’s prevailing court attitudes as well as the plethora of unwritten local norms. The failure rate for those who try their chapter 13 case without an attorney is above 98 percent (according to the Bankruptcy Court’s statistics, not mine).
Business Reorganizations : Chapters 9, 11 & 15
Types of Reorganizations
- Chapter 9 (municipality)
- Chapter 11 (business)
- Chapter 15 (cross border bankruptcy)
Unlike liquidation, reorganization allows a business debtor to keep operating the business and keep assets that might otherwise be lost in a chapter 7 bankruptcy.
In exchange, the debtor (person or business) must agree to pay debts in strict conformity with a bankruptcy court-approved Reorganization Plan. Creditors are unable to pursue debts beyond the terms of the reorganization plan during this time frame. This allows the debtor to rearrange their affairs in order to pay their financial commitments.
Reorganizations can be used to remove entirely unsecured mortgages or pay the fair market value of a property.
This allows the debtor to keep the property and pay only the fair market value of the secured debt rather than the full amount owed. There are a few exceptions to this rule. The debtor has the option of surrendering their property to the lender or landlord.
A debtor must have sufficient income to make a reorganization plan possible in order to be qualified for a reorganization bankruptcy.
The bankruptcy court may order liquidation if the debtor does not follow the reorganization plan. A debtor who completes the reorganization plan successfully is entitled to a discharge of their remaining debts. The purpose of this strategy is to reward the diligent debtor who seeks to help creditors by settling their debts, in keeping with the prevailing preference for bankruptcy rehabilitation rather than liquidation.