Defining Your Bankruptcy Options: Chapter 7, Chapter 11 and Chapter 13 - Westgate Law

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Defining Your Bankruptcy Options: Chapter 7, Chapter 11 and Chapter 13

When considering solutions to financial catastrophe, bankruptcy is an obvious choice. Legal professionals can walk individuals in need of bankruptcy advice through the basics and show them the ropes, but it’s best to walk into this type of situation with a basic understanding of the terminology. It helps avoid confusion.

Generally speaking, bankruptcy is a legal proceeding. It involves an individual or a business that is not able to pay off outstanding debts. In most bankruptcies, the process begins when the debtor files a petition. In a smaller number of cases, the petition can be filed on behalf of the creditors. During the bankruptcy process, the debtor’s assets are considered, measured and evaluated. Available assets are then allocated to repay portions of the outstanding debt. Upon completion of the bankruptcy proceedings, the debtor is relieved of any further financial obligations related to all debt incurred prior to the bankruptcy filing.

Bankruptcy comes in three forms:

Chapter 7: A Chapter 7 bankruptcy proceeding requires that a company filing stop all operations. The company filing goes out of business. The appointed trustee liquidates all company assets. The money obtained from the sell of assets is used to pay off debt. The debtor is relieved of financial obligations that aren’t taken care of through the sale of company assets. Creditors paid first are those who took the least risk. One such creditor is a secured creditor. Secured credit is typically backed by collateral (a mortgage or other asset). Next in line for payment are unsecured creditors followed by investors. This process of determining who receives payment first is referred to as “absolute priority.”

Chapter 11: This type of bankruptcy involves a reorganization of the debtor’s affairs and assets. Chapter 11 bankruptcy is often filed by corporations and time is generally required in order to restructure the corporation’s debts. After the Chapter 11 proceedings, the corporation has a fresh start, but is dependent upon the debtor’s successful fulfillment of obligations agreed upon in the reorganization. This type of bankruptcy is the most complex as well as the most expensive in most cases. It should only be considered as a viable option after all other alternatives have been considered.

Chapter 13: In a Chapter 13 bankruptcy the debtor completes a reorganization of their finances under the supervision of the court. The debtor is required to submit a plan to repay outstanding debt in a time frame ranging from 3-5 years. The repayment plan submitted must use 100% of the debtor’s income for repayment as well as offer significant payment to creditors. Payment to creditors under Chapter 13 must be equal to or greater than payment they would receive under other types of bankruptcy. The Chapter 13 bankruptcy is different than the Chapter 7 (the outright foreclosure of assets) and Chapter 11 (expensive/complicated debt restructuring). With the Chapter 13 the debtor still has a significant income and submits a detailed plan to the court that outlines the plan to payback creditors over 3-5 years. One benefit available through Chapter 13 bankruptcy is preventing the foreclosure of a debtor’s residence.

Knowing the difference between the types of bankruptcy before you begin the filing process will be very helpful. To get more details on bankruptcy and which type of bankruptcy best suits your needs contact Westgate Law today.

About the Author

Justin Harelik

Justin has a singular goal: to get people out of financial distress and move them to financial stability and prosperity. He does this by combining 15 years of in-depth experience in bankruptcy, credit management, debt negotiation and student loan modifications, and he does it with both English and Spanish-speaking clients.

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