In the current economy, millions of individuals and businesses are struggling with debt. In many cases, it is due to circumstances out of their control such as unexpected medical expenses or a layoff due to the poor economy. As the debt grows, it can begin to feel insurmountable and may negatively impact the person’s day-to-day life. Bankruptcy often provides an opportunity for a fresh financial start.
Chapter 7 Bankruptcy
Chapter 7 bankruptcy is available to both individuals and consumers and is commonly known as a liquidation bankruptcy. This is because assets are sold off, and the proceeds are used to pay off the debt. For a business, this will be all assets. An individual will be allowed to keep living essentials such as clothing, a modestly priced home, and a car to get to work. After the liquidation, most remaining debts will be discharged except the following.
- Child support
- Spousal support
- Student loans
- Court-ordered fines
- Court-ordered restitution
- Most tax debt
- Debts incurred through fraud
The definition of fraud is the most important to understand. This includes things like going on a spending spree immediately before bankruptcy with the intent of never paying the credit card bill or selling assets to friends and family for less than they’re worth to keep the assets out of the bankruptcy estate. If a debtor makes fraudulent transactions or otherwise fails to comply with bankruptcy procedures, the court may decide not to discharge some or all of their debts following the liquidation.
Chapter 13 Bankruptcy for Consumers
Chapter 13 bankruptcy is an alternative form of bankruptcy for individuals with regular incomes. While it is primarily geared towards unsecured debts, such as credit card balances, it can often be a chance to renegotiate payments on secured debts such as mortgages and car loans.
With regard to unsecured debts, all payments will be consolidated into one single payment plan that is due to be paid off within three to five years. While the total payments will generally be less than the original debt, any remaining balance will be discharged as long as the terms of the bankruptcy plan are met.
Chapter 13 bankruptcy provides the opportunity for a fresh financial start because the payment plan will be no more than the debtor can afford each month. When setting the payment plan, the court will ensure that the debtor has sufficient income remaining to pay essential living expenses such as food, housing, and utilities.
Chapter 11 Bankruptcy for Businesses
Chapter 11 bankruptcy allows businesses burdened by debt to reorganize and stay in business rather than shutting down. Similarly to Chapter 13 bankruptcy for individuals, a business with adequate cash flow will be allowed to restructure its operations and finances to become profitable. In most cases, the existing management will remain in control of the business since they know it best, but restrictions and covenants will be put into place to ensure that the creditors are repaid.
In order to file for Chapter 11 bankruptcy, the business is required to make detailed financial disclosures to its creditors and the bankruptcy court. These statements are similar to those that must be provided in a prospective stock offering. The business also must submit a reorganization plan that details the changes it intends to make, and creditors have the right to object to any plan they feel does not protect their interests. Once a plan is approved, the business will need to strictly follow it to enjoy the financial protections given by the reorganization.
While many personal bankruptcies are routine affairs, business bankruptcies and bankruptcies for high-net-worth individuals can often result in substantial litigation. Complex asset structures, ownership of multiple business entities, and unique debt agreements can lead to heated debate about what assets should be included in a bankruptcy, which lenders have priority to recover, and whether past transactions were structured to hide assets from the bankruptcy estate.
After a bankruptcy filing, each creditor has a right to contest any proposed settlement, and if assets are potentially available, it is likely that they will do so. Resolving the disputes will frequently require extensive legal filings, and, in many cases, witness testimony about how transactions were handled and what the intent of the transaction was may be required. In addition to disputes about past transactions, there is also a strong likelihood in business bankruptcies of competing creditors fighting for future control of the business’s affairs in any restructuring.
Loss mitigation is a process that allows a homeowner to avoid losing their home in foreclosure. The parties will negotiate for an alternate arrangement such as a loan modification, short sale, or forbearance agreement. Banks will agree when they believe that they will recover more money through this process than they would have if there was a short sale.
Loss mitigation is frequently coupled with bankruptcy, and there are several advantages to doing this. In bankruptcy, the bank would typically foreclose on the loan and take a loss on the sale; the bank therefore has a strong reason to negotiate with the homeowner for a better deal. Loss mitigation can also help the homeowner prevent the bank from receiving a deficiency judgment against the homeowner for any losses the foreclosure sale didn’t cover. Finally, if the homeowner is able to eliminate other debts and payments in bankruptcy, they will have more free cash available to pay their mortgage.
For assistance with any part of the bankruptcy process in Manhattan, Long Island, or Queens, contact The Law Office of Donna M. Fiorelli today.