BANKRUPTCY BASICS

The Bankruptcy Code (Title 11 of the United States Code) gives the force of law to several national policies or values. First is the value of allowing a debtor a breathing spell and a fresh start, the chance for a productive future unburdened by past debts and mistakes. Second is the value of a fair distribution of a debtor's property among creditors. The federal bankruptcy system is designed to achieve an orderly, equitable distribution of the debtor's assets under court supervision and compulsion. By contrast, state law on creditors' rights has been called "grab law." Each creditor grabs what it can, and the debtor is dismembered. The swift creditor is rewarded. The slow creditor gets nothing.

TWO TYPES OF BANKRUPTCIES: CHAPTER 7 AND CHAPTER 11

Under Chapter 7, the debtor's assets are simply liquidated. Upon filing a Chapter 7 petition, the debtor turns its keys over to a private trustee and walks out of business. The trustee is appointed by the Office of the U.S. Trustee (a part of the Justice Department that generally monitors bankruptcy proceedings). The filing of the Chapter 7 petition creates a "bankruptcy estate" that the trustee administers for the benefit of creditors. The trustee locates and liquidates everything of value that the debtor had.

Under Chapter 11, the debtor stays in possession of its assets. Its business continues. It proposes a plan of reorganization. The plan usually proposes a restructuring of debts and can affect equity. A committee of creditors may arise as a counterweight to the debtor, monitoring the debtor's handling of the business, particularly the handling of cash and equivalents, called "cash collateral." The creditors' committee may urge and participate in the debtors' development of a plan. After 120 days, during which the debtor has the exclusive right to propose a plan, the creditors' committee or an equity security holders' committee may propose a plan. The creditors' committee, viewed mainly as an interference by debtor, can nevertheless benefit the debtor. The tension created by the committee's monitoring can help debtor obtain approval for rehabilitative steps if and when debtor can show the court that the committee approves. Ultimately, in a typical Chapter 11, debtor proposes a plan and a disclosure statement. Creditors may vote against the plan, but the court may approve a plan it deems fair ("cramdown"). Bankruptcy Code Section 1129(b). If debtor does not propose a plan, the case may be converted to a Chapter 7 liquidation or dismissed. An alternative to the plan process may be a sale of assets, then a liquidation.

Selecting Chapter 7 or Chapter 11- For a business contemplating bankruptcy, a key inquiry in deciding between Chapter 7 and Chapter 11 is whether the business can be rehabilitated. If the future can be better than the past, then the considerable requirements of Chapter 11 may be worthwhile. The requirements include substantial initial filings, regular reporting to U.S. Trustee, answering to creditors, and developing a plan, not to mention the expense. The demands of Chapter 11, for debtor as well as creditors, should not be underestimated. If hope for rehabilitation is gone, Chapter 7 is the option.

AUTOMATIC STAY

Creditors must stand still from the moment of filing, by virtue of the "automatic stay" (or injunction) on new lawsuits, continuation of old lawsuits, letters, and phone calls to the debtor. Bankruptcy Code Section 362(a). Relief from stay may be sought by motion. Bankruptcy Code Section 362(d). Grounds are "cause" (not defined) or, if creditor wants to act against property, the debtor has no equity in the property and the property is not necessary to an effective reorganization. Stay relief motions are expedited.

CREDITOR STATUS

Secured Creditors -The distribution scheme pays secured creditors first. Determination of secured status is important. Under Bankruptcy Code Section 506, a claim is secured to the extent of the value of the creditor's interest in the estate's interest in property. For example, the estate includes a 50 percent interest in a warehouse. The warehouse is worth a million dollars, so that the value of the estate's interest is $500,000. A creditor has a claim in the amount of $600,000, secured by the estate's interest in the warehouse. The creditor is secured to $500,000, and unsecured in the amount of $100,000.

Unsecured Creditors:

Priority Claims - Some unsecured claims have priority. Bankruptcy Code Section 507. Among these are: administrative expenses (including costs of preserving the estate and post-petition taxes on the estate, compensation of the trustee and his or her attorney, and compensation of a creditor that recovers concealed property of the estate); wages earned by an employee within 90 days before filing of the petition); and certain contributions owed to an employee benefit plan.

Other Unsecured Claims - Without priority, a claim is a general unsecured claim, vulnerable to impairment or extinguishment under Chapter 7 or Chapter 11.

INVOLUNTARY BANKRUPTCY

Most bankruptcies are voluntary, but involuntary bankruptcy may occur. Bankruptcy Code 303. For example, creditors see debtor selling off assets and distributing money to employees and shareholders to the detriment of creditors. Or creditors see debtor in a downward spiral so that creditor with a chance for 50 cents on the dollar in May will get 20 cents in September. Creditors may confer and file an involuntary petition, placing debtor in Chapter 7 or Chapter 11. If debtor has at least 12 creditors, at least three must sign the involuntary petition. Other creditors may join later. Creditors can make the petition stick if "the debtor is generally not paying such debtor's debts as such debts become due unless such debts are the subject of a bona fide dispute." Bankruptcy Code Section 303(h) (1).

THE DISCHARGE

A main goal of the voluntary bankruptcy debtor is the discharge or, for practical purposes, extinguishment of the debtor's debts. Just as the automatic stay precludes pursuit of the debtor during the pendency of the bankruptcy case, the discharge precludes creditor's recovery after the conclusion of the bankruptcy case. Judgments against the debtor are voided. The practitioner should note that a post-discharge complaint filed against debtor still must be answered; debtor pleads the discharge as an affirmative defense. During the pendency of the bankruptcy case, however, a creditor may file a complaint (a separate lawsuit under the umbrella of the main bankruptcy proceeding) to have that creditor's debt excepted from a discharge because, for example, that particular debt was obtained by fraud or is a debt arising from a fiduciary duty. Bankruptcy Code Section 523. Also, a creditor may file a complaint urging that debtor be denied a discharge of all debts because, for example, debtor has concealed property, or destroyed records necessary to determine debts, or because debtor has otherwise been uncooperative with the Bankruptcy Court. Bankruptcy Code Section 727.

PREFERENCES AND FRAUDULENT TRANSFERS

Preferences - Anticipating disaster for the business, debtor may transfer title to the warehouse to an officer of the company who had lent the company a bundle. Or debtor may simply pay a supplier 100 percent of its balance due, and days later, in bankruptcy, leave other creditors only 20 cents on the dollar. In the name of equity, a transfer of the debtor's interest in property may be avoided by the trustee or the debtor in possession as a "preference" among creditors. A preference is a transfer: (1) to or for the benefit of a creditor; (2) for an "antecedent debt" owed by the debtor before the transfer; (3) made while the debtor was insolvent; (4) made between 90 days and one year before the debtor filed bankruptcy, if the transfer is to an insider [defined in Bankruptcy Code Section 101(31)], and within 90 days before filing if the transfer was to a non-insider creditor; and (5) the creditor received more than under Chapter 7 liquidation. Bankruptcy Code Section 547(b). The transferee, receiving the bitter news that he must disgorge money fairly earned, may defend. Defenses include "a contemporaneous exchange for new value" and "ordinary course of business." Bankruptcy Code Section 547(c).

Fraudulent Transfers - A fraudulent transfer, also avoidable, is a transfer made with actual intent to hinder, delay or defraud creditors, or, regardless of intent, made for less than reasonably equivalent value. For example, when the bank is about to foreclose, the debtor may not transfer the warehouse to the president's aunt or uncle as a gift, or convey title in a "sale" for $1,000. Bankruptcy Code Section 548.

This has been a glimpse of a complex area. Subjects mentioned here, as well as others in the bankruptcy process, warrant close examination in addressing the client's particular facts.

Massive debt is something many Americans face. Debt reduction is now becoming more and more of a necessity. Even a low amount of debt can cost you a lot in the end and it can take a very long time to pay off. An example: Let's say you have $4000 in credit card debt and your interest rate is 14%. If you only make the minimum payment each month, it will take you 21 years to pay it off and you will have paid over $5100 in interest. Doesn't that sound awful? This is why you may be interested in debt reduction.

Debt reduction can be done in many different ways. A recent method being used is to buy some debt reduction software. You can purchase debt reduction software online or at a computer software store. The software usually comes with a debt reduction calculator to help you decipher how quickly your debt will be paid off in accordance to you monthly balance payments. Similarly, there are also debt reduction books you can purchase at your local bookstore.

The best route for help with debt reduction is to go see a credit counselor or a debt reduction counselor. Most charge a fee for help with debt reduction, but there are several non profit debt reduction organizations that help people with massive debt for free. There are also courses in debt reduction offered at many college campuses. Sometimes you may also learn of free debt reduction seminars. It is best to call around and see which option is the best for you.

The first step to debt reduction is to realize you are in debt, and you may have poor spending habits. To start debt reduction off on the right foot, you must decipher needs versus wants. You should only purchase things you need, not things you want. An example: you need food, water, shelter, electricity, etc. You want new shoes, to dine at fancy restaurants, a fancy car. To get anywhere in debt reduction, you must separate these two things. Only spend money on what is absolutely necessary, not on things you want but don't need. This is probably the most difficult part of debt reduction many people face.

Many people are in debt because of the many loans they have. These can be a car loan, house loan, school loan, etc. Many people end up way over their head in debt. When you have this many loans, go see a debt reduction counselor or credit counselor to help you consolidate these debts and hence start your way to debt reduction.

With the proper frame of mind and some restraint you can eliminate your debt in a fast and easy manner. Once you come to realize that you need help with debt reduction, you will be that much closer to eliminating your debt. Seek out help and get that enormous weight off your shoulders. I promise you will feel much better.

When homeowners consider filing bankruptcy to put a hold on the foreclosure process, most are attempting to save their homes and establish some sort of payment plan. Unfortunately, legal payment arrangements established in a Chapter 13 bankruptcy can often be too expensive for homeowners just recovering from a financial crisis. This is why filing Chapter 7 to eliminate the mortgage and other debt may be a better solution and provide better peace of mind for some borrowers unable to keep their homes.

Contrary to conventional wisdom, mortgage loans (firsts, seconds, HELOCs, and so forth) can be discharged in Chapter 7 bankruptcy proceedings so that homeowners no longer have to worry about paying an expensive loan when their income has dropped. But with a discharge, the owners will not be able to keep their house or remain living there for very long, as the bank will receive the collateral back as a result of the loan being eliminated. So there must be other reasons for owners to consider this tactic, since it does not actually save the house.

The main benefit of doing this is that homeowners are able to stop foreclosure from moving any further along in the legal process, meaning no more court documents, lawsuit paperwork, sheriff sale dates, or eviction hearings. Even if the borrowers move out of their house before the foreclosure process is completed, the courts will still move ahead with the necessary procedures to sell the house to satisfy the mortgage lien. Discharging the mortgage through bankruptcy ends the lawsuit immediately -- the mortgage company must cease all collection efforts on the loan, which will then disappear completely upon discharge.

Another important reason to consider filing Chapter 7 to eliminate the mortgage and move out of the house is the possibility of avoiding deficiency judgments after foreclosure. Although few banks sue their former clients again after the sheriff sale for the difference between what was owed and what the property sold for, it may be best just to discharge the mortgage and not worry about any further lawsuits regarding this property. With the credit crisis in full swing, some banks may get desperate enough for cash that they start attempting to collection on deficiencies from borrowers who obviously had problems paying their debts just a few months ago.

Bankruptcy is an important legal defense that homeowners have against unmanageable debt burdens and aggressive collections efforts, whether they are from credit cards, collection agencies, or mortgage companies. Collectors will never give up trying to go after a debt, and every day of the foreclosure process can be a nerve-wracking experience for owners unfamiliar with how it works and the time frames for each step. Although the social stigma of bankruptcy may be severe, many debtors will liberated and generally much feel better with a fresh start and no extra debt.

One concern homeowners may have is that they do not want a foreclosure and a bankruptcy to appear on their credit reports, which will virtually guarantee they do not receive a new loan for years. But if there is no way to save the home, using bankruptcy to stop foreclosure may be the best solution to get all of the bad over with at once. If the bank tries to go after a deficiency judgment months or a year after the sheriff sale, and borrowers are forced into bankruptcy anyway, they have merely prolonged the time it will take to repair their credit.

Discharging a mortgage in Chapter 7 bankruptcy is one of the lesser-discussed methods of avoiding foreclosure, potentially because it has some of the worst aspects of any solution. Homeowners neither save their home nor do they preserve much of their credit scores. But this tactic should be considered by debtors who know their financial conditions will not allow them to keep making the mortgage payment and who just want to escape from their large debts and get a fresh start in life.

Bankruptcy laws throughout the United States are the same since they are created by the federal government. Approximately 1.6 million individuals file for bankruptcy protection yearly in the United States.There are two of the Chapter of Bankruptcy that apply to individuals.Chapter 7 and Chapter 13 are your choices as an individual.

When filing for bankruptcy under Chapter 7, an individual gives the court a list of all owned assets. With the exception of a few assets stipulated as exclusions by the government, a trustee will sell the assets to pay as much of your debt as possible. With Chapter 7, most of the individuals debts are wiped out. Some of the debts that cannot be wiped out include taxes, alimony and child support, student loans and debts that are not specifically mentioned in that particular bankruptcy filing.

You may only file for Chapter 7 Bankruptcy as frequent as every six years. To file costs you $299. When you file for bankruptcy under Chapter 13, the amount of the debt is reduced but the debt it self is not wiped out. A reduced extended repayment schedule is created by the trustee and the debtor may be allowed to keep assets that would have automatically been sold if Chapter 7 had been filed. The repayment period specified by the trustee is anywhere between 3-5 years usually. The court typically has the individual makes monthly payments to the trustee. The trustee then makes the payment to the creditors. To file under Chapter 13 you must owe less than $250 thousand in unsecured debt and less than $750 thousand in secured debt.

When it comes to personal Bankruptcy it is important to remember, you got into your financial situation by not paying who you owed when you were supposed to. Once the petition is approved and accepted by the court, make it a specific point to help prevent that same situation from happening again.

Do not take on new credit cards unless you can afford them. Also when you do have credit cards or loan payments, make them on time. Do not get yourself so far in debt you can not see the light at the end of the tunnel. Good luck and good fortune.

If you are in a situation where you are going to file for a Bankruptcy it is good to know what it is going to cost you. It is harder to make it today because of the rising prices of everything we seem to get more into debt and that is why bankruptcy is on the rise. It is important to understand that a Bankruptcy can stay on your credit report for up to 10 years and it is always advisable to file a Bankruptcy as your last option.

Having a Bankruptcy on your credit report can be hurtful to your credit score but the positive thing about it is you can improve it. If you are faced with filing you may want to look at other options first such as Debt Consolidation. You can check into getting a consolidation loan that can help you with making your debt more manageable.

If you have no other option than filing a bankruptcy can keep creditors away and even though it is more expensive than it used to be, can still be an only option for some people. You can spend hundreds of dollars for the filing fee and the bankruptcy attorney can also charge into the thousands depending on your situation.

One thing also is to consider that you will not have credit for up to ten years and also you may have a higher insurance premium if you file for bankruptcy.

Remember that you should only file when you have no other option available and makes ure you understand how a bankruptcy affects you and your family.

The purpose of the bankruptcy law is to give honest people a way to get out of debt and start over again. The law does not help those who think they can simply avoid a debt they want to eliminate for whatever reason. This is an important distinction to understand. Filing bankruptcy is a serious decision with long reaching consequences on your credit, but for millions of people it is also a law that offers hope for a fresh start financially.

The bankruptcy law was revised in October 2005 largely in response to claims by creditors that it was too easy for people to claim bankruptcy just to avoid paying their bills. But if you are in serious financial trouble and cannot honestly pay your debts then the new bankruptcy law's more stringent filing requirements will not delay your bankruptcy.

The bankruptcy law has many different sections that address both individual and business bankruptcies. The law's intent is to distribute certain assets after statutory exemptions are excluded and then use the proceeds to pay off as much creditor debt as possible. The court determines which creditor gets what amount. All bankruptcies must go through federal district court, though each state has laws concerning the payments to creditors. This is just another example of why you need a bankruptcy attorney.

The bankruptcy law established "chapters" which merely indicates the kind of bankruptcy being filed. Chapter 7 is the one used most frequently by individuals. A court appointed trustee oversees the identification and selling of non-exempt assets and the use of the proceeds to pay debts. In reality, because assets such as a house and car may be exempted, there is often no asset liquidation required. Chapter 11 is used by large corporations that are reorganizing and need to restructure debt in order to survive. There is also a chapter 12 used by farmers and chapter 13 used by individuals asking for a court established and monitored repayment plan.

For individuals filing chapter 7 there are many different aspects to the law which can impact the final result. The law will not allow you to cancel some debts such as child support. The really good news is that you will not lose your home if your debt meets the rules for determining exempt equity. The same is true for your car. You are also allowed to retain cash accounts as long as the sum total does not exceed $10,000. The courts have recently ruled that retirement accounts like IRA's are also exempt.

It's easy to see that the new bankruptcy law has many complex provisions, but the goal of these statutes is to give you an honest chance to start over without a heavy debt burden. Your bankruptcy attorney will assist you throughout the entire process.