March 21, 2005
Every year business and individuals file for bankruptcy it has almost become common practice to do so. Bankruptcy is a legal procedure that begins when an individual or business that can't pay their debts to creditors. Sadly enough, there were as many bankruptcy cases filed in federal courts, as there were all other cases. The American bankruptcy law almost encourages debtors who are unable to pay their debts to file for bankruptcy. Is filing bankruptcy a good thing or a bad thing?
Bankruptcy law allows for business to continue operating depending on what chapter of bankruptcy they file for and how far in debt they are in. Businesses have to consider want chapter to file under chapter 7 or chapter 11. Most times business file bankruptcy to find a way to become more profitable again. Under Chapter 7 liquidation takes place, and the company goes out of business and under chapter 11, reorganization takes place. "The process of starting a claim starts when a bankruptcy petition is filed and then an estate is created. An estate is all the debtors' current assets." "A trustee is appointed to administer the assets during a straight line bankruptcy." The trustee's job is to liquidate the estate, and any money received goes to secured creditors first."(To the extent of their collateral") (Bagley, Constance E. 2002 P. 919) "The unencumbered funds are applied in this order. (1) Pay priority claims, such as bankruptcy administrative expenses, wages or benefits up to 2000 dollars per employee, consumer's deposits up to 900 dollars, and most unsecured taxes; (2) To pay general unsecured creditors with timely filed claims coming before tardy ones." (3) To pay no compensatory fines or penalties; (4) To pay legal interest on unsecured claims. In practice the estate is rarely adequate to pay unsecured creditors even Fifty cents on the dollar; No assets cases are very common." (Bagley, Constance E. 2002 P. 919) Under chapter 11 and any major decisions that need to be made concerning the business has to have the approval of the bankruptcy court. Under chapter 7 the plan that is developed has to be approved by a judge, and must be done in good faith. An individual can file for bankruptcy under chapter 7 or 13. Chapter 7 for an individual is almost the same as it is for a business. One of the differences is that you're not going out of business. Under chapter 7 a trustee is appointed and oversees all your assets, and in some states they allow you to keep your house. Normally individual debtors get a discharge. "There are non dischargeable debts such as (1) Taxes; (2) Educational loans (unless repayment would constitute an undue hardship); (3) spousal or child support; (4) fines or penalties (5) drunk driving liabilities; and (6) claims arising from fraud or theft or willful and malicious injury." (Bagley, Constance E. 2002 P. 919) The criteria the court looks at when assessing undue hardship is whether a debtor can "maintain a minimal standard of living for the most of the loan during repayment period, depending on current rent, income and expenses." The second thing the courts look at is whether or not the debtor has made good faith repayments efforts. (Bagley, Constance E. 2002 P. 919) Under chapter 7 individual can keep certain property which is not included in the bankruptcy estate such as a house, car, trade tools, and alimony or injury settlement that provide for individuals future needs. Every state exemption varies and there is usually a maximum dollar amount that you can have by necessity. Under chapter 13 an individual can normally keep their property. An individual must have a steady income, and must agree to pay part of your income to creditors. A court must approve your payment plan, and budget a trustee is assigned and will collect your payments and distribute it to your creditors. The trustee job is also to make sure that you live up to the agreement of the plan. "Creditors...
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