What Do You Need to Know About Bankruptcy?
Bankruptcy allows businesses and individuals reorganize finances and liquidate assets to meet debt obligations when either is unable to pay creditors. By declaring bankruptcy, business and individuals establish more affordable repayment terms with creditors. The bankruptcy process is governed by federal law under authority granted to Congress by the U.S. Constitution. Since there are various types of bankruptcy proceedings, filers need to know some of the particulars of some of the most common types of bankruptcy.
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Chapter 7
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A chapter 7 applies mostly to individual debtors who are unable to continue making regularly scheduled payments to creditors. A chapter 7 bankruptcy requires selling any eligible assets and using the money to repay creditors. Consequently, filing for bankruptcy under the rules of chapter 7 of the bankruptcy code may result in property loss. This liquidation process is managed by a bankruptcy trustee who is appointed by the bankruptcy court with authority in the location of the individual or business. However, not all property is subject to liquidation in a chapter 7. For example, a trustee is unable to liquidate any property subject to a lien like a mortgage because repayment is promised to another creditor. Property exemptions also exist on the state and federal levels.
Chapter 11
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Chapter 11 bankruptcy proceeds are commonly used by businesses to reorganize to better meet debt obligations. Reorganization refers to restructuring the business to a profitable scale. This bankruptcy option enables the business to continue operating but must submit a reorganization plan within 120 days of filing for bankruptcy. The court with authority over the case has the right to approve or deny the reorganization plan. Chapter 11 bankruptcy rules require the business to provide creditors with a copy of the reorganization plan for evaluation. Chapter 11 rules also grant the business the same rights as a trustee in a Chapter 7 bankruptcy. This allows the business to decide what debts to pay and which to discharge.
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Chapter 13
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Individuals with income have the option to file for bankruptcy under chapter 13 of the bankruptcy code. Under the rules of chapter 13 bankruptcy, individual debtors have the option to submit a plan to repay creditors over a certain time. A chapter 13 bankruptcy prevents the loss of any property but the debtor must make all the payments according to the repayment plan. During the period of repayment, the debtor has the added protection from further collection actions such as garnishments or lawsuits from creditors.
Members of the Military
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The Servicemembers' Civil Relief Act temporarily relieves members of the military from certain civil actions. The relief is designed to allow service members to fully focus on military duties and avoid distraction by legal action. This law protects service members against default judgments, authorizes a stay of bankruptcy proceedings and prevents creditors from executing any garnishments. Additional protections by the Service members' Civil Relief Act protect service members and dependents from eviction unless the landlord obtains a court order. In addition, members of the military have the legal right to break existing housing or car leases if military duties result in the service member's transfer.
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