This article explains what is business bankruptcy, also known as Chapter 11 and Chapter 13. Bankruptcy laws allow a debtor to work with their creditor while undergoing a supervised division of the debtor’s assets by the court.
Understanding Business Bankruptcy
By allowing a debtor to retain some assets, bankruptcy can give the debtor's business some future hope of survival under the supervision of the court. There are certain provisions that allow a debtor to retain ownership of his business and to pay back his debts with his future business proceeds, made possible by the bankruptcy proceeding. Other provisions in the bankruptcy laws call for the distribution of some assets to pay all or part of a balance owed to creditors and will completely relieve the debt, whether the balance is paid in full or not.
Bankruptcy proceedings are now supervised by and litigated in the United State Bankruptcy Courts that are a part of the District Courts in the United States (federal courts, as opposed to state courts.) Congress established that United States Trustees are appointed and are responsible to take care of supervision and administration of bankruptcy trials. The United States Congress established the Bankruptcy Rules which govern the bankruptcy courts. Individual States do not regulate bankruptcy proceedings but they are allowed to regulate other aspects of the relationship between a debtor and creditor.
Bankruptcy proceedings are filed under 3 basic headings, Chapter 7 (consumer) and Chapters 11 and 13 (business) of Title 11 of the United States Code (bankruptcy section.)
Chapter 11 - Commercial Bankruptcy
Chapter 11 bankruptcy proceedings are usually designated for businesses and for restructuring business debt and also to enable business to be released from obligations for certain contracts and leases. Chapter 11 is not allowed for individuals. If there are stockholders in a business that files for a Chapter 11 bankruptcy, their personal assets are not at risk, only the value of the stock that they hold in the business.
Chapter 13 - Small Business Bankruptcy
Chapter 13 allows for restructuring and repayment of debt. This is also referred to as a “mini-Chapter 11” bankruptcy. Chapter 13 is for small businesses and individuals who qualify for it. They are allowed keep their businesses and assets while they make arrangement to repay their creditors. Chapter 13 is different from chapter 7 in that it allows all property to be kept while the debt is being repaid, even luxury items like a boat, motorcycle or other valuables.
All bankruptcy proceedings can be started voluntarily by the debtor or can be initiated by the creditor. Once bankruptcy proceedings are started, the creditor may not proceed with any further collection efforts. At this point, a debtor will have declared certain properties as part of his estate and may not transfer them to anyone else. If any property was recently transferred prior to filing, they may be declared invalid or delayed until the bankruptcy proceedings are over. Each creditor will also have a priority assigned to them.
In April 2005, major bankruptcy reform in the United States was brought about by the passage of the Bankruptcy Prevention and Consumer Protection Act. The passage of this law made changes in the guidelines that governed the Chapter 7 liquidation of debt law. Chapter 11 or 13 proceedings were reformed so that the debtor would be allowed to be “rehabilitated” so the debtor could pay back creditors in the future according to a plan. The new law also made it a requirement for an individual to undergo credit counseling before that individual can file for bankruptcy. It must be from an approved budget and credit-counseling agency.
As United States Bankruptcy laws are complex and, now that new laws have been added, filing for bankruptcy is more difficult. While filing for bankruptcy should be your last option, if you must file, find a Bankruptcy Lawyer who is an expert in this area and familiar with the new bankruptcy laws.
- Bankruptcy & Debt:
- Bankruptcy - Chapter 13
Chapter 11 Business Bankruptcy Basics: Chapter 11 & Chapter 13
By Michael Wechsler |
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