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Wednesday, September 2, 2015

Bankruptcy Basics, What is Bankruptcy

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 sub-chapters 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 so on) it is a “universal” chapter, therefore anyone can file, if their 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 (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 set up a plan of repayment for those debts based on their priority and classification as set out in the Code.

Most individuals will file chapter 7, or chapter 13 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. The most common is sub-chapter 11, which is for corporate restructuring think, General Motors.

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 terms for ease of understanding. The remaining sub-chapters 1, 3 and 5 have applicability to each of the other aforementioned chapters; they explain general provisions, case administration, the commencement of a case, the duties and powers of officers, administrative powers and they explain and define creditors, the debtor, the estate, what claims and creditors are. They explain who the debtor is, and her duties and benefits, and how the estate is created and what it contains.

/s/ Charles L. Basch II, Attorney and Counselor ©

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