Bankruptcy

Bankruptcy 2018-05-04T09:01:59+00:00

The term ‘bankruptcy’ refers to a federal court procedure that enables someone who owes a debt to catch up on their debt by one of several possible actions: 1) having some of the debt cancelled 2) while other debts are repaid. The route a person takes depends on the type of bankruptcy they file with the court.  A person, or business, usually files for bankruptcy under one of three chapters – 7, 11, or 13 – and the type of bankruptcy selected has a lot to do with how the court will handle the solving of the debt.  Also, the situation of being incapable of settling one’s debt is known as insolvency.

The Role of the Trustee in Bankruptcy Court

Bankruptcy has its own dedicated system of courts, unlike the most common cases you find that are headed for civil trial or a criminal court. Every judicial district in the U.S. has a bankruptcy court of its own.  Every state has at least one district, and in total there are 90 districts across the 50 states.

Generally, the court delegates administration of the debt to a “trustee.” Trustees are appointed to oversee bankruptcy cases; some of them specialize and oversee only certain bankruptcy chapters.

In some bankruptcy cases the debt is forgiven.  The court order that frees a debtor from being personally liable for certain debts is called a bankruptcy discharge.  This ‘order’ releases the debtor from financial obligation to repay the debt and keeps creditors and collection agencies from contacting debtors with efforts to try and collect funds.

People may not gain a full understanding of what a trustee does if they don’t know first what a “bankruptcy estate” is. Within the laws drawn up for bankruptcy scenarios, a bankruptcy estate is set up at the time a person files for bankruptcy.  The ‘estate’ consists of the debtor’s property and the law makes a distinction between the estate itself and the debtor – these become two separate legal entities.

As a debtor going through the process will learn, since the bankruptcy estate is not an actual person, past legislation decided that a bankruptcy trustee was needed to step in and play the role of overseeing the bankruptcy estate.  Today, this person is responsible for performing various duties required by law, and he/she must look into all of the various circumstances involved with each bankruptcy case. The bankruptcy court appoints these trustees.

What Role does the Judge play?

Our nation’s bankruptcy judges are given the authority to make legally binding decisions in bankruptcy cases, including eligibility issues or they can decide whether to have a debt be discharged (forgiven). However, most of the tasks associated with the bankruptcy process will be done outside of any court. For example, an appointed trustee carries out all his delegated administrative duties from his office or at a meeting place with the debtor.

In addition, a debtor will experience very little interaction with the bankruptcy judge. Most Chapter 7 applicants won’t even set foot in a court and might only come face-to-face with the judge if there are objections to the bankruptcy plan.

Who can file for bankruptcy?

Individuals or businesses can file for bankruptcy.  However, if an individual owns a sole proprietorship, he should file much the same way a normal ‘consumer’ -someone who doesn’t own a business -would do.  This usually means deciding between a Chapter 7 bankruptcy or Chapter 13.  Chapter 11 is for corporations and other multi-leader organizations that need to reorganize their debt while maintaining operations.  In any case, a trustee will look into the solvency of the applicant (filer) and generally coordinate with the client’s creditors to resolve the debt issue.

Overview of Bankruptcy Options

With this option many -or sometimes all- of a person’s debts are cancelled. As an outcome of the legal process under Chapter 7 laws, the trustee might liquidate (sell off) some of the property so that creditors can receive some degree of pay off.  This type of bankruptcy can be known as “straight” or “liquidation” bankruptcy, names given under Chapter 7 of the federal Bankruptcy Code.

A person cannot use Chapter 7 as an option if he or she has already received a bankruptcy discharge in the last six to eight years.  There are several other conditions which will be explored in the article devoted solely to Chapter 7 matters.  Also, certain debts cannot be discharged in a Chapter 7 bankruptcy, such as alimony, fraudulent debts, child support, certain taxes, student loans, and certain items purchased on credit. In most Chapter 7 cases, the debtor has large credit card debt and other unsecured bills yet has very few assets to help him use a liquidation strategy. In this case, it might be wiser for that person to consider Chapter 13, especially if he needs to hang on to certain property. In most of the cases, a Chapter 7 bankruptcy will be able to fully eliminate all those debts.

Generally, Chapter 13 debtors appear in court only one time, at a bankruptcy plan confirmation hearing. The informal meeting of the creditors, known as a “341 meeting,” based on Section 341 of the Code) is usually held at the trustee’s office. Under provisions of a chapter 13 bankruptcy, a debtor proposes a three to five-year repayment plan to the creditors, proposing to pay off all or a fraction of the debts by funding it from the debtor’s future income.  A debtor can also use Chapter 13 to prevent a house from being foreclosed, to make up missed car or mortgage payments; additionally, he can pay back taxes, or finally, to stop interest from building on tax debt.

If a person can continue fulfilling the terms of the repayment agreement, all his remaining dischargeable debt will be released at the end of the plan. Again, this typically occurs within three to five years.  The amount to be repaid is determined by several factors including the debtor’s disposable income as is usually determined as part of a “means test,” which is applicable in Florida and some other states.

Usually, Chapter 13 bankruptcy is chosen by debtors who want to keep certain secured assets, such as a home or car, when they have more equity in the secured assets than they can protect with their bankruptcy exemptions, as outlined by the state where they live.

Here is another manner of summarizing the difference between Chapter 7 and Chapter 13 bankruptcies: Chapter 13 bankruptcy mainly consists of a reorganization plan in contrast with a liquidation, as the Chapter 7 option entails.

Chapter 11 is the primary avenue a small or larger corporation, some non-profits, and other more ‘complex’ -that is, not a sole proprietorship -organizations are likely to take.  The reason is simple: Chapter 11 bankruptcy proceedings were tailor made for organizations that need to stay afloat, maintain some sort of normal operations, while having space and time to reorganize their debt payment arrangements.  Again, an entity like a trustee, called the U.S. Trustee, goes into the matter, helping creditors to better comprehend what the debtor is dealing with.  Chapter 11 is generally labor intensive for the debtor and the various professionals involved, for example, the attorneys and accountants, are handed a lot of paper to deal with.  Hence, this route can get quite expensive to navigate successfully.

In some cases, an individual can also utilize Chapter 11 as an option.  In rare instances, the debtor can use Chapter 11 to reorganize his/her debt structure and take advantage of certain provisions that, like a company can use, he can also benefit from those strategies.  In this case he/she serves as a “debtor-in-possession” to add the necessary oversight to move matters along, much the way a trustee would provide oversight, like scheduling payments, etc.

The ultimate objective of the Chapter 11 option is to propose a plan and gain approval for a debt-centered reorganization plan.