Bankruptcy – An Overview

Bankruptcy is a legal vehicle that provides relief to individuals and businesses in serious financial trouble. Generally, the bankruptcy process assesses the debtor’s assets and liabilities and provides a structure within which the debtor is allowed to keep exempt property while attempting to satisfy as many eligible debts as possible (according to an order of priority established by law). Remaining eligible debts are discharged. Certain debts, like domestic support orders, debt obtained by fraud and most tax debt, are generally ineligible for consideration in a bankruptcy case.

The traditional stigma of bankruptcy has faded for the most part, and it has been replaced by the view that bankruptcy is a fresh start after a time of financial trouble. Many bankruptcy debtors have experienced unexpected and extreme financial shock that is out of their control, caused by sudden events such as job loss, business failure, death, divorce or illness.

In such cases, filing bankruptcy may be the right answer. If you are facing serious financial challenges, contact Key, Greer, Harrison, & Casey in Pelham, AL, to schedule a consultation with an experienced bankruptcy attorney who can help you assess your legal options.

Bankruptcy laws are primarily federal, and bankruptcies are administered by the federal courts. However, the various states’ consumer and commercial laws do play important roles in certain bankruptcy issues. In addition, each state has its own list of property exemptions.

Bankruptcy is an available option for individual consumers, businesses, farmers/fishermen and municipalities. There are two major bankruptcy types: liquidation and reorganization. For practical purposes, many debtors have so-called no-asset cases where all (or nearly all) of the debtors’ property is exempt from the liquidation requirement and eligible debt is discharged without any property being sold.

Chapter 7

Chapter 7 of the Bankruptcy Code governs liquidation bankruptcy. Chapter 7 filings are available to both individuals and businesses. Upon the filing of a Chapter 7 bankruptcy petition, the bankruptcy court issues an “automatic stay” that stops most collection proceedings against the debtor. A bankruptcy trustee is responsible for gathering the debtor’s nonexempt property, if any, liquidating it and distributing the proceeds to the creditors in order of legal preference, with secured creditors being paid before unsecured ones. If there are not enough assets to cover all the debtor’s liabilities, then the creditors of lowest legal priority may only be partially paid, or may be unpaid altogether.

For an individual consumer debtor, these remaining debts are discharged and no longer the responsibility of the debtor. That being said, there are certain types of debt that will survive a bankruptcy proceeding. These include domestic support obligations like child support and alimony, most tax debts and many student loans. For a business debtor, the liquidated business generally does not survive the bankruptcy, as its assets have been sold and it is no longer profitable.

Reorganization

A reorganization bankruptcy is more appropriate where there is ongoing income that can be used to pay creditors, at least in part. Reorganizations are governed by several chapters of the Bankruptcy Code. Chapter 11 generally controls reorganizations for individual debtors with high debts or for business entities. Chapter 13, on the other hand, generally covers individual consumer debtors with lower debts. Farmers and fishermen can file for reorganization under Chapter 12, while municipalities seeking debt reorganization should seek assistance under Chapter 9.

As in a liquidation bankruptcy, filing for reorganization generates an automatic stay of most collection activity. The debtor then develops a plan to repay debts over a three-year to five-year period through a bankruptcy trustee. At the successful conclusion of the payment plan, if certain conditions are met, remaining dischargeable debt is cancelled. If the debtor fails to make payments under the plan or fails to make alimony, child support or certain tax payments as well as his or her scheduled plan payments, the court may either dismiss the case or convert the reorganization to a liquidation proceeding.

Involuntary bankruptcy

In addition to bankruptcies filed voluntarily by debtors, creditors may have a legal remedy through “involuntary bankruptcy” petitions under Chapters 7 or 11. If either there is a minimum level of debt present or there are a minimum number of creditors, creditors can file a bankruptcy petition against a debtor (regardless of the debtor’s wishes) to ensure that assets are distributed fairly among creditors through the bankruptcy process. Involuntary bankruptcy proceedings must be meritorious; penalties for filing improper or malicious petitions can be steep.

Speak to a bankruptcy lawyer

Bankruptcy law can benefit debtors and creditors alike, depending on the circumstances. If you feel that bankruptcy may be appropriate for your financial situation, contact Key, Greer, Harrison, & Casey in Pelham, AL, to schedule a consultation with a skilled bankruptcy attorney.

DISCLAIMER: This site and any information contained herein are intended for informational purposes only and should not be construed as legal advice. Seek competent legal counsel for advice on any legal matter.

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