Tuesday, June 11, 2013

How Does Bankruptcy Protection Work

Bankruptcy can provide you with protection from creditors.








The bankruptcy system was created by U.S. federal law to balance the interests of creditors with the interest of debtors in obtaining a fresh start. Bankruptcy protection is available to individuals and companies. Four types of bankruptcy are possible: Chapter 7, Chapter 11, Chapter 12 and Chapter 13.


Chapter 7


Chapter 7 bankruptcy may be filed by individuals or companies. It liquidates the debtor's assets and distributes all but statutorily excluded items (such as living expenses) to creditors. Creditors may force Chapter 7 bankruptcy if the creditor's debt obligations exceed his income and he cannot meet his debts as they come due. Once a Chapter 7 petition is filed, creditors cannot take collection action against the debtor without the permission of the bankruptcy court. If the debtor is a corporation, its debts will not be discharged, but the debts will be dissolved during proceedings. Individuals will enjoy full discharge of all debts included within the bankruptcy estate.


Chapter 11








Chapter 11 bankruptcy is designed for corporations and limited liability companies, and results in reorganization of the debtor rather than liquidation. Individuals may be placed in Chapter 11 bankruptcy if their debts exceed the Chapter 13 statutory debt ceiling. Creditors may force a company into Chapter 11 bankruptcy. The court will prevent creditors from taking collection action without permission and will authorize a payment plan that partially satisfies creditors. Once a company emerges from Chapter 11 bankruptcy, its debts will be permanently discharged. In some cases, a court may deny a Chapter 11 petition and convert it into a Chapter 7 petition instead.


Chapter 12


Chapter 2 bankruptcy is designed for family farmers and fishermen. If the petition is accepted, the debtor will negotiate a five-year repayment plan with creditors, subject to court approval, after which point his remaining debts will be discharged. If the debtor agrees to meet any child support or alimony obligations, the repayment period may be shortened to three years even if this results in less money for creditors.


Chapter 13


Chapter 13 bankruptcy is designed for individuals rather than companies. The debtor must complete a payment plan approved by the court. The debtor must dedicate all income beyond statutory exclusions to completing a 36 to 60 month payment plan for 100 percent of his debts. If the court determines that the debtor is not capable of this, it may convert a Chapter 13 petition to a Chapter 7 or Chapter 11 petition. Although Chapter 13 bankruptcy does not offer discharge of debts, it does result in a suspension of collection action (such as foreclosure) as long as the debtor keeps up with his payments.

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