Bankruptcy


A. Alternative to Bankruptcy

Debt Counseling and Management

With the new bankruptcy laws many people will not be able to file for Chapter 7, many more will lack the discipline necessary to follow up with a Chapter 13 plan. In the same way, bankruptcy should not be an option for someone who will have to give up too much property, or has incurred too much last minute debt, or has debts that cannot be discharged. There are alternative to stopping the harassment and rebuilding your credit.

B. Personal

1. Chapter 7

Chapter 7 is called liquidation bankruptcy because there are no payments over time and it lets you eliminate most of your debts in exchange for giving up property that is not exempted by law. Filing for bankruptcy puts into effect an automatic stay, which immediately stops your creditors from trying to collect what you owe them. So, at least temporarily, creditors cannot reach your assets. Once the court approves the bankruptcy, a court appointed bankruptcy trustee sells your property and distributes the money to your creditors. Any remaining unpaid debt is forgiven. Most debtors, unless their property is a collateral (house or car) for a secure debt, own property that is either exempt or essentially useless for creditors. Your main residence, car, necessary clothing, household items, personal effects… are exempt property. If you have a second house, equity in your house, luxurious items… those will probably not be exempt. But because many people do not have many non-exempt items, few debtors end up giving up their property. Certain kinds of debts or obligations, such as child support payments, student loans and taxes, cannot be eliminated in Chapter 7 bankruptcy. After Bankruptcy you will no longer owe your creditors for any debt the court discharges and you can restart building your credit. But, note that the Bush Administration has made it impossible for many people to file for Chapter 7; many are left with the option of filing Chapter 13 or finding alternatives to their financial dilemma.

2. Chapter 13

If your debts are essentially consumer debts, and particularly luxurious expenses, and you earn a high salary, the courts are not likely to let you file a chapter 7. With the new Bankruptcy laws many people are going to be forced to convert their Chapter 7 filing to a Chapter 13, even if they do not earn high salaries. Chapter 13 does for an individual what Chapter 11 does for a business, it lets you reorganize your finances. You repay your debts through a Chapter 13 plan by making monthly payments to a court appointed trustee, for three to five years. Your payment amount depends on how much you owe, and the type of debts you have incurred. A major drawback with Chapter 13 is that you have to actually complete your entire repayment plan to get any benefit from the Chapter 13 process. If you miss a payment your Chapter 13 fails. You are also not likely to spend money on anything the court does not find necessary. Just like Chapter 7, Chapter 13 will stay in your credit file for at least seven years, but more likely for ten years from the date of filing.

C. Business

1. Chapter 7

Companies which are so far in debt as to warrant closing down are often forced into filing Chapter 7. Under Chapter 7, the company stops all activities and goes completely out of business. The court will appoint a trustee to sell the company's assets for cash, and the funds are used to pay off the debts of the company. After the administrative and legal expenses are paid, secured creditors are then paid. If there is money left after that unsecured creditors are paid and sometimes, this is rare, there is enough money for the investors to get their investment. Investors are only notified if there is money left after the creditors have been paid.

2. Chapter 11

If a company has some issues but is not so far into debt that it warrants a filing of Chapter 7 liquidation bankruptcy, it can file Chapter 11 to reorganize the business. Even though the management continues to be in the hands of the managers, officers, all important decisions have to be approved by the bankruptcy court. Under a Chapter 11, the business keeps doing business. A trustee, appoint one or more committees to represent the interests of creditors and stockholders (if it is a corporation), to work with the company to reorganize it. Chapter 11 provides a process for rehabilitating the business. Sometimes the company successfully works out a plan to return to profitability; sometimes, it has to liquidate.

Minnesota only.



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