Before doing any research, you may believe that bankruptcy is simply the
process
people go through to get out of paying their financial obligations.
Bankruptcy
is actually very complicated, and neither option (Chapter 7 or Chapter 11)
will
allow an individual to get out of paying all of your debt!
Chapter 7 bankruptcies are often referred to as the "liquidation"
bankruptcy.
Chapter 7 bankruptcies can be filed by individuals, partnerships,
corporations
or any other business entity.
If an individual or company is filing Chapter 7, it's because they are
beyond
the ability of reorganizing their debts and are forced to sell many of
their
assets in order to pay creditors. A trustee is appointed to the filer, and
is
responsible for ensuring that any assets that are secured and can be sold
are
sold – and that the proceeds from the sale are given to the specific
creditor
that secured the purchase in the first place.
If the sale of secured assets result in more money than what is owed to the
secured creditors, the assets and cash are pooled together and paid to the
outstanding creditors who had provided unsecured loans to the individual or
business.
One of the main reasons why people and organizations file a Chapter 7
bankruptcy
is to discharge eligible debts and give themselves a fresh start. A debtor
who
successfully files Chapter 7 will have no liability for the discharged
debts –
but there are many types of debts that cannot be discharged, including
loans
used for college, child support and/or alimony, or a lien on a property. A
discharge of debt under a Chapter 7 is only possible for individual
debtors –
not partnerships or other types of corporations.
Once the proper paperwork is filed with the court to begin the Chapter 7,
creditors must stop contacting the debtor attempting to collect the debt.
An individual may be denied debt discharges under a Chapter 7 case if the
court
finds the individual did not keep (or produce) adequate financial records,
committed a crime of perjury, was unable to explain loss of assets,
concealed,
destroyed or illegally transferred property to try and move it out from the
estate, or failed to complete a financial management course as required of
all
debtors filing bankrtupcy.
A Chapter 11 bankruptcy is referred to as the "rehabilitation" bankruptcy.
The
individual or business can file for Chapter 11 – or the creditors may
involuntarily file for the debtor in certain situations. Most Chapter 11
bankruptcies are filed by corporations or other businesses rather than
individuals.
In this type of bankruptcy, the debts are reorganized to allow the
individual or
business a better chance of repaying them and keeping their head above
water.
The creditors are contacted to get different terms on any loans – interest
rates
may be lowered, the amount of time you have to repay a debt may be
extended to
make the monthly payments lower and hopefully, easier to manage. A trustee
is
appointed to supervise the assets but nothing is sold at this time.
In a Chapter 11 bankrtupcy, you aren't getting rid of your debts – you are
simply restructuring and changing the terms of the debt and making plans
to pay
it back continuously through future earnings.
If a business is filing Chapter 11, it's expected to continue operating
successfully. If that proves not to be possible, the business can then
file for
Chapter 7 and liquidate assets.
In both a Chapter 7 and Chapter 11 filing by a corporation, it's likely
that the
common shareholders would receive little or no return on their investments.
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