Bankruptcy: The way out?

Do you know someone who has been through a Chapter 7, 11 or 13 bankruptcy proceeding because of a divorce, separation, business failure or other problem? For individuals and companies, bankruptcy proceedings can lead to renewal and a foundation for future strength and success.

Let’s take a look at the finer points and opportunities of the three different bankruptcy chapters. My thanks to attorney Jennifer Herzog at Godfrey & Kahn, S.C., in Milwaukee, for her help in compiling this information.

Chapter 7

This is usually the least complicated form of bankruptcy for individuals, married couples, partnerships and corporations. It’s an asset liquidation proceeding, though liquidation is rarely required.

An appointed trustee sells your non-exempt assets and distributes them to creditors according to rules within the bankruptcy code. To be eligible for this chapter, you must pass a “means test” created by the 2005 amendment to the bankruptcy code.

In most consumer cases, all the assets are declared exempt and, therefore, there are no distributions available to creditors. You declare your assets when you file the official petition for bankruptcy. It’s imperative that you itemize all assets and debts in the form of a complete declaration.

The date of the filing actually “freezes” your rights and those of the creditors on that day. A first meeting of creditors, which you must attend, is called shortly afterward. You must respond under oath to any questions from trustees about your assets and liabilities. If there are non-exempt assets, the trustee takes control of them and dispenses them according to the bankruptcy code.

Creditors have 60 days from the first meeting of creditors to challenge your right to a discharge. It’s important to note that before you, the debtor, are discharged, you must complete two courses on financial responsibility from a certified trainer.

Discharge usually takes up to six months. At that point, most or your debts that existed as of the bankruptcy filing date can no longer be collected. Certain debts, such as student loans and child support, can’t be discharged.

Chapter 11   

This bankruptcy tool is typically used by larger companies to restructure their debt, but it’s also available to individuals and partnerships.

You can keep your assets, but the court supervises the operation of the business. A creditor’s committee, composed of up to 20 of the largest unsecured creditors, may be formed to oversee your company’s operations.

In a Chapter 11 proceeding, creditors vote to accept your company’s reorganization plan. If they reject the plan, you can still seek statutory relief.

Chapter 11 probably offers the most flexibility, but at a higher cost than the other chapter alternatives. It also has a lower success rate than the others because the creditors have a strong say in the reorganization plan.

Chapter 13

This proceeding allows individuals to complete a financial reorganization that is supervised by a federal bankruptcy court. Debtor rehabilitation is subject to a court-approved plan.

Selecting Chapter 13 has its advantages, especially if you want to keep non-exempt property that might otherwise be taken in a Chapter 7.

But Chapter 13 also has disadvantages. You might not have the income necessary to fund an acceptable plan. The code sets debt limits – unsecured debts of less than $336,900 and secured debts of less than $1,010,650 – for filing.

With Chapter 13, you develop a plan to pay creditors within three to five years. The amount repaid is generally less than what’s owed, and you can keep your property. You must start repaying within 45 days after bankruptcy court proceedings have started.

A major disadvantage for a personal bankruptcy filing is that this stays on your personal credit record for up to 10 years. A major advantage is that Chapter 13 also lets you suspend foreclosure and garnishment actions.

This overview is very general and only intended to give you a taste of what’s in store if you choose one of these three options.

Hopefully, you don’t have to sit down with an attorney to discuss any of them.

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