Bankruptcy is a process a business goes through in federal court. It is designed to help your business eliminate or repay its debt under the guidance and protection of the bankruptcy court. Business bankruptcies are usually described as either liquidations or reorganizations depending on the type of bankruptcy you take. Bankruptcy is the legal proceeding involving a person or business that is unable to repay outstanding debts. The bankruptcy process begins with a petition filed by the debtor, which is most common, or on behalf of creditors, which is less common. All of the debtor’s assets are measured and evaluated, and the assets may be used to repay a portion of outstanding debt. Bankruptcy offers an individual or business a chance to start fresh by forgiving debts that simply cannot be paid while offering creditors a chance to obtain some measure of repayment based on the individual’s or business’s assets available for liquidation. In theory, the ability to file for bankruptcy can benefit an overall economy by giving persons and businesses a second chance to gain access to consumer credit and by providing creditors with a measure of debt repayment. Upon the successful completion of bankruptcy proceedings, the debtor is relieved of the debt obligations incurred prior to filing for bankruptcy. All bankruptcy cases in the United States are handled through federal courts. Any decisions over federal bankruptcy cases are made by a bankruptcy judge, including whether a debtor is eligible to file or whether he should be discharged of his debts. Administration over bankruptcy cases is often handled by a trustee, an officer appointed by the United States Trustee Program of the Department of Justice, to represent the debtor’s estate in the proceeding. There is usually very little direct contact between the debtor and the judge unless there is some objection made in the case by a creditor.
Types of Bankruptcy Filings
Bankruptcy filings fall under one of several chapters of the Bankruptcy Code: Chapter 7, which involves liquidation of assets; Chapter 11, which deals with company or individual reorganizations, and Chapter 13, which is debt repayment with lowered debt covenants or specific payment plans. Bankruptcy filing specifications vary among states, leading to higher or lower filing fees depending on how easily a person or company can complete the process.
Chapter 7 Bankruptcy
Individuals or businesses with few or no assets file Chapter 7 bankruptcy. The chapter allows individuals to dispose of their unsecured debts, such as credit cards and medical bills. Individuals with non-exempt assets, such as family heirlooms (collections with high valuations, such as coin or stamp collections), second homes, cash, stocks, or bonds, must liquidate the property to repay some or all of their unsecured debts. So, a person filing Chapter 7 bankruptcy is basically selling off his or her assets to clear debt. Consumers who have no valuable assets and only exempt property, such as household goods, clothing, tools for their trades, and a personal vehicle up to a certain value, repay no part of their unsecured debt. If you are ready to start a new business or explore other career options, Chapter 7 could fit the bill. Chapter 7 business bankruptcy allows you to eliminate most (if not all) of your unsecured debts, including medical bills, personal loans, payday loans, cash advance loans and credit card debt. Once you file for Chapter 7 bankruptcy, it typically takes about six months to receive your discharge. In this type of business bankruptcy, the company goes out of business. Chapter 7 discharge does not relieve certain debts, including mortgages and car loans, and it can also result in the loss of property if your equity is non-exempt. If you plan to reorganize and start your existing business anew, this is not the right type of business bankruptcy to file. Chapter 7 bankruptcy will appear on your credit report for 10 years, and you won’t be able to file Chapter 7 and receive debt discharge again within eight years.
Chapter 11 Bankruptcy
Businesses often file Chapter 11 bankruptcy, the goal of which is to reorganize and once again become profitable. Filing Chapter 11 bankruptcy allows a company to create plans for profitability, cut costs, and finds new ways to increase revenue. Preferred stockholders may still receive payments, though common stockholders will not. For example, a housekeeping business filing Chapter 11 bankruptcy might increase its rates slightly and offer more services to become profitable. Chapter 11 bankruptcy allows a business to continue conducting its business activities without interruption while working on a debt repayment plan under the court’s supervision. In rare cases, individuals can file Chapter 11 bankruptcy. Filing business bankruptcy under Chapter 11 can help you avoid having to close your company – although filing Chapter 7 instead always remains an option. Public companies often choose Chapter 11 because it allows them a chance to become profitable again and to provide value to their shareholders. When you obtain debt relief through a Chapter 11 claim, an automatic stay is put in place, meaning creditors cannot attempt to collect repayment during the term of the stay. Meanwhile, you’re able to create a reorganization plan to pay back debts and regain profitability, usually by renegotiating leases, contracts and other binding agreements. Creditors are often receptive to reorganization under a Chapter 11 business bankruptcy plan, since the payment they receive is more favorable than it would have been under Chapter 7. Since winning a Chapter 11 business bankruptcy discharge does not require selling your assets, if you believe you can make changes that will result in profitability, Chapter 11 could be your best bet. Chapter 11 business bankruptcy is very complex, takes a long time to move through the courts and is expensive (i.e. higher filing fees and court costs). The repayment plan can be for long periods of time and can stretch to 20 years or more. And after all that, it won’t necessarily succeed.
Chapter 13 Bankruptcy
Individuals who make too much money to qualify for Chapter 7 bankruptcy may file under Chapter 13, also known as a wage earners plan. The chapter allows individuals and businesses with consistent income to create workable debt repayment plans. The repayment plans are commonly in installments over the course of a three- to five-year period. In exchange for repaying their creditors, the courts allow these debtors to keep all of their property including non-exempt property. Many sole proprietors have personal assets combined with their business assets. In Chapter 13, you can avoid losing your personal assets versus Chapter 7 business bankruptcy, where some (but not all) of your personal property is exempt from being sold. Chapter 13 also allows more debt to be discharged than Chapter 11, and you can even apply for a Hardship Discharge to have your debts dismissed. It is also typically a faster and cheaper process than Chapter 11. It can take up to five years to repay your debts under a Chapter 13 business bankruptcy plan. Your debts are paid with your disposable income, so whatever extra cash you have is committed to debt repayment. If you obtain debt relief by filing business bankruptcy under Chapter 13, you’re barred from filing a Chapter 7 claim for six years. Chapter 13 cases remain on your credit report for 10 years.
Steps to File for Bankruptcy
It starts with compiling all your financial records – debts, assets, income, expenses – and listing them. This not only gives you a better understanding of your situation, but also gives anyone helping you (and eventually the court) a better understanding. The next step is to receive credit counseling within 180 days before filing your case. This is required step. You must obtain counseling from an approved provider listed on the Utah Courts website. Most counseling agencies offer this service online or over the phone. The courts want you to do this to make sure you have exhausted all possibilities of finding a different way to handle your problem. It’s important to understand that credit counseling is required. You will receive a certificate of completion from the course and this must be part of the paperwork when you declare bankruptcy, or your filing will be rejected. Next, you file the petition for bankruptcy. If you haven’t done so at this point, this might be where you realize you need to find a bankruptcy lawyer. Legal counsel is not a requirement for individuals filing for either Chapter 7 or Chapter 13 bankruptcy, but you are taking a serious risk if you choose to represent yourself. For one thing, you may not understand federal or state bankruptcy laws or be aware which laws apply to your case, especially regarding what debts can or can’t be discharged. Judges are not permitted to offer advice and neither is the court employees involved in a case. There also are many forms to complete and some important differences between Chapter 7 and Chapter 13 that you should be aware of when making decisions. Finally, if you don’t know and follow the proper procedures and rules in court, it could affect the outcome of your case. When your petition is accepted, your case is assigned to a court trustee, who sets up a meeting with your creditors. You must attend the meeting, but the creditors do not have to be there. This is an opportunity for them to ask you or the court trustee questions about your case. If you cannot afford to hire an attorney, you may have options for free legal services. If you need help finding a lawyer or locating free legal services, check with the American Bar Association for resources and information.
Bankruptcy Terms to Know
Throughout bankruptcy proceedings, you’ll likely come across some legal terms particular to bankruptcy proceedings that you’ll need to know. Here are some of the most common and important ones:
• Bankruptcy trustee: This is the person or corporation, appointed by the bankruptcy court, to act on behalf of the creditors. He or she reviews the debtor’s petition, liquidates property under Chapter 7 filings, and distributes the proceeds to creditors. In Chapter 13 filings, the trustee also oversees the debtor’s repayment plan, receives payments from the debtor and disburses the money to creditors.
• Credit counselling: Before you’ll be allowed to file for bankruptcy, you’ll need to meet either individually or in a group with a non-profit budget and credit counseling agency. Once you’ve filed, you’ll also be required to complete a course in personal financial management before the bankruptcy can be discharged. Under certain circumstances, both requirements could be waived.
• Discharged bankruptcy: When bankruptcy proceedings are complete, the bankruptcy is considered “discharged.” Under Chapter 7, this occurs after your assets have been sold and creditors paid. Under Chapter 13, it occurs when you’ve completed your repayment plan.
• Exempt property: Although both types of bankruptcy may require you to sell assets to help repay creditors, some types of property may be exempt from sale. State law determines what a debtor may be allowed to keep, but generally items like work tools, a personal vehicle or equity in a primary residence may be exempted.
• Lien: A legal action that allows a creditor to take, hold and sell a debtor’s real estate for security or repayment of a debt.
• Liquidation: The sale of a debtor’s non-exempt property. The sale turns assets into “liquid” form cash which is then disbursed to creditors.
• Means test: The Bankruptcy Code requires people who want to file Chapter 7 bankruptcy to demonstrate that they do not have the means to repay their debts. The requirement is intended to curtail abuse of the bankruptcy code. The test takes into account information such as income, assets, expenses and unsecured debt. If a debtor fails to pass the means test, their Chapter 7 bankruptcy may either be dismissed or converted into a Chapter 13 proceeding.
• Reaffirmed account: Under Chapter 7 bankruptcy, you may agree to continue paying a debt that could be discharged in the proceedings. Reaffirming the account and your commitment to pay the debt is usually done to allow a debtor to keep a piece of collateral, such as a car, that would otherwise be seized as part of the bankruptcy proceedings.
• Secured debt: Debt backed by reclaimable property. For example, your mortgage is backed by your home, and for an auto loan, the vehicle itself is the collateral. Creditors of secured debt have the right to seize the collateral if you default on the loan.
• Unsecured debt: A debt for which the creditor holds no tangible collateral, such as credit cards.
Things to Know About Filing Bankruptcy
• Deadlines: Deadlines are critical in bankruptcy court. The rules in bankruptcy are very complex, can be technical, and all case deadlines must be met. Failing to file the appropriate forms or documentation on time may result in your case being dismissed or delayed.
• You need to qualify to file for bankruptcy: Many people who would have qualified for a Chapter 7 discharge before the 2005 changes must now use Chapter 13 instead, which involve repayment of some of your debts. This is determined using the Means Test.
• Repayment Plans: In a Chapter 13 bankruptcy case a repayment plan that must be filed with the court. The court has a process that will determine exactly what income and expenses you have, and then calculate the reasonable expenses and monthly repayment amount for your case. In Utah this plan must be submitted to the court and confirmed.
• DIY Bankruptcy: Representing yourself in bankruptcy can be a huge mistake. The laws and the corresponding rules in bankruptcy can be very confusing, and many common errors could cost you a chance at a new financial start. An experienced attorney can help you determine the right laws to help you, represent you at the hearings and the meetings with creditors, and get most of the time save you money in the end.
• Focused Court: The Bankruptcy Court is a federal court which exclusively deals with bankruptcy cases. These courts are located around the United States, and they only handle bankruptcy cases and matters related to this legal area. You reside in an area that is served by a bankruptcy court.
• You get your own Trustee: The Department of Justice and the Bankruptcy Court will appoint a trustee in your case. This trustee will be responsible for overseeing your specific case and ensuring that all of the documentation is filed. The trustee is not in favor of either the consumer or creditors, but is an officer of the court instead.
• Get the best attorney: Choosing the right attorney that you can afford to represent you in bankruptcy court is very important and can affect the outcome of your case. You want a lawyer who will aggressively defend you and work hard to overcome any objections that may be presented by your creditors or the trustee. Experience is also very important, so you want an attorney who is very knowledgeable in bankruptcy law and that has been in the game for a long time.
• Your goal is a discharge: Another interesting thing to know about filing bankruptcy is that a bankruptcy discharge is an order issued by the bankruptcy court stating which of your debts are forgiven. Usually this will include most unsecured debts that have not been repaid are eliminated in the process unless you have reaffirmed your obligation.
Free Initial Consultation with Lawyer
It’s not a matter of if, it’s a matter of when. Legal problems come to everyone. Whether it’s your son who gets in a car wreck, your uncle who loses his job and needs to file for bankruptcy, your sister’s brother who’s getting divorced, or a grandparent that passes away without a will -all of us have legal issues and questions that arise. So when you have a law question, call Ascent Law for your free consultation (801) 676-5506. We want to help you!
8833 S. Redwood Road, Suite C
West Jordan, Utah
84088 United States
Telephone: (801) 676-5506