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Wednesday, May 4, 2011

Bankruptcy Basics

What is bankruptcy?  Webster defines bankruptcy as “the quality or state of being bankrupt” and bankrupt as “a person judicially declared subject to having his or her estate administered under the bankrupt laws for the benefit of creditors” or “a person who becomes insolvent.” Insolvency, or the inability to pay legal debts, can cause someone to file for voluntary protection under the federal bankruptcy laws.  An involuntary bankruptcy is one forced upon an entity or person by the creditors.  The most common is the voluntary case, where the entity or person enters into the case on their own accord and decision.

11 USC Section 101 through Section 1523 covers the federal laws on bankruptcy commonly known as the “bankruptcy code” and includes the subchapters 7, 9, 11, 12, 13 and 15.  Chapter 7 is by far the most common sub-chapter filed in the United States, and it can be filed by any entity (individual, married couples, corporations, LLC’s and son on) it is a universal chapter, therefore anyone can file, if there sole intent is to liquidate and get a fresh start.   If an entity or person “qualifies” for a chapter 7 they can have certain debt eliminated and obtain a fresh start without losing their basic assets.  Liquidation occurs when an entity or person has an asset that they cannot legally protect under the exemptions and exceptions stated in the bankruptcy code, when that happens a chapter 7 trustee will seize those assets and liquidate them, or in other words reduce them to cash for the benefit of the creditors involved in the case, and distribute what they can to those affected creditors.  

Chapter 13, the adjustment of debts of an individual with regular income, or “personal reorganization” sub-chapter is the second most common chapter filed in the United States, and can only be filed by people, not corporations or other business entities, with regular income.  Chapter 13 involves a repayment plan over a period of years not to exceed 60 months or 5 years.  The basic premise is to take all of your creditors, such as mortgage creditors, auto loan creditors, tax creditors, medical bills and credit cards to name a few and classify them and propose a plan of repayment for those debts based on their priority and classification.  

Most individuals will file under one of the above mentioned sub-chapters for the relief they need.  However, there are the other sub-chapters available, 9, adjustment of debts of a municipality, 11, reorganization, 12, adjustment of debts of a family farmer or fisherman with regular annual income, and 15, ancillary and other cross-border cases.  Of these the most common is sub-chapter 11, which is for corporate restructuring such as what General Motors has done.  

This is the basic framework of the bankruptcy law and its sub-chapters, as we go on the complexity of each chapter will be uncovered and put into its basic form for easy understanding.  The remaining sub-chapters 1, 3 and 5 have connections to each of the other aforementioned chapters and explain general provisions, case administration and the commencement of a case, the duties and powers of officers and administrative powers, they explain and define creditors, the debtor, and the estate and what claims and creditors are.  They explain the debtor, and her duties and benefits, and how an estate is created and what it contains. 
/s/ Charles L. Basch II, Attorney and Counselor

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