Wednesday, September 2, 2009

Understanding Different Types of Bankruptcy

Bankruptcy is the possibility, under federal law, for an individual or business entity to liquidate debts, eliminate debts, or work out a payment plan to pay some or all of their debts over a period of time. Bankruptcy contemplates the meeting of debtor (the person who or entity which files for bankruptcy) and creditors under the structure of the bankruptcy laws to give the debtor the opportunity to obtain a “fresh start” without the overwhelming pressure of pre-existing debt.

Businesses may file for bankruptcy with one of two options for emerging from bankruptcy. The first is liquidation, a winding up and closing of the business. In that case, all of the assets and liabilities of the debtor (the entity that files for bankruptcy) are listed, and with the filing of the petition for bankruptcy, all creditors are informed of the filing as well as the total assets and liabilities of the debtor. At the end of the liquidation process, the debtor is no longer in business. The other type of bankruptcy for businesses contemplates reorganization. At the end of the reorganization process in the bankruptcy court, the business emerges to continue operations.

For individuals, the bankruptcy process provides the “honest but unfortunate debtor” with the opportunity for a fresh start. Under Chapter 7 of the Bankruptcy Code, individual debtors who qualify under the “means test” set forth in the Code may discharge certain debts. The debts are paid from the proceeds of a sale of certain types of property (“non-exempt” property) by to a trustee appointed by the Bankruptcy Court. Some debts, such as criminal fines or child support, may not be discharged.

Individuals may also file for bankruptcy under Chapter 13, which provides the opportunity to restructure debt and extend payment terms over a period of years. It is important to note that while Chapter 11 will operate to stop a foreclosure, Chapter 7 does not.

The bankruptcy laws are complex, and filing for bankruptcy has ramifications that must be considered prior to filing. If you contemplate filing for bankruptcy, contact an attorney.

Information provided courtesy of the Long Beach Bankruptcy Attorneys at Claveran Law Firm Sphere: Related Content


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