This is a different article for me to write. This article is not intended to be the complete authority relating to bankruptcy, nor is it intended to provide direct advice to all of the readers. The reason I am writing this article is because it is important for each company and individual to face up to certain realities now that the new bankruptcy law will soon take effect and that certain rights exist today which may not exist in a short period of time.
For purposes of this article, I want to concentrate on the three types of bankruptcy that are available and used by most individuals and businesses. The intent of bankruptcy is to allow a “fresh start” to individuals and to provide breathing room to reorganize a business in order to assist in turning it around and becoming profitable once again.
Most readers have heard of a Chapter 7 bankruptcy. In very simplistic terms, what this means is a person hands over all of their debts to the court, along with most of their assets. An individual is allowed to keep certain assets (which includes a certain amount of equity in one’s home, furniture, certain pension plans, a certain amount of equity in cars, certain personal assets and limited family heirlooms and more), which are referred to as being “exempt” and then the trustee (person who is appointed by the court to oversee the liquidation of the assets) determines if there are any remaining assets to be liquidated and sold to pay off creditors based upon a formula. An individual receives a discharge and, subject to certain rules, most debts no longer exists (certain debts such as unpaid court ordered support, taxes which are not at least 3 years old and secured debts are not discharged).
Chapter 13 is commonly referred to as the “Wage Earner’s Plan.” What an individual does when they file a Chapter 13 bankruptcy is “freeze” there current outstanding debts and using a formula, they turn over their earnings to a trustee who then, based upon a plan developed by the debtor and approved by the court, pays to the creditors a specific monthly amount until the debts have been satisfied. This does not wipe out or “discharge” the debts, but develops a payment method.
Chapter 11 is available to businesses which find themselves in an extreme amount of debt due to some unforeseen circumstances, whose creditors are not willing to work with them, but based upon a plan of reorganization, can be profitable in the future. I describe it as taking all of your bills and putting them in a shoe box for a period of time, operating your business profitably on a go forward basis, and then coming up with a plan to pay the bills in the shoe box over a period of time, and maybe even at a discount. The operator of the business maintains control of the business as they become, in essence, the trustee under the supervision of the United States Bankruptcy Trustee’s Office. Failure to fulfill obligations however can and usually results in the dismissal of the Chapter 11 or conversion to a Chapter 7.
The above explanations are summaries, and are not intended to be a full explanation of the bankruptcy laws. It is important to seek the assistance of a qualified attorney to assist you in this process. Our offices can assist a client in filing a Chapter 11 or Chapter 7, but we refer all Chapter 13 work to other attorneys.
The new law will limit the ability of individuals to file Chapter 7 and will require them to file under Chapter 13. What this means is that if someone has the need to file a Chapter 7 bankruptcy petition to protect their assets and to have a “Fresh Start” they need to do it now, not later.
There are many individuals who are not attorneys who attempt to help in the filing of bankruptcy petitions, but as I have stated in other articles, you would only go to a licensed medical professional when you are sick, so why would you trust your financial future to an unlicensed individual. If you need a referral to an attorney for assistance, you may call our offices or the Riverside County Bar Association.