and Chapter 11
Reform Bites Back: For consumers, debt relief is harder to
come by. And that's adding to housing woes. "But today's
growing problem in the housing market is differentforeclosures
are soaring, while bankruptcies, though clearly on the upswing,
are running roughly at half the 2001-2003 pace. The reason:
A new bankruptcy law, approved by Congress in 2005 after years
of debate, makes it much harder for households to get out
from under their consumer debt. The result: More people being
forced to walk away from their homes, leaving lenders holding
the bag. Perversely, a law intended to help the financial
industry may be damaging the housing sector, creditors and
borrowers alike. "It doesn't matter what you think of
the purpose of the new bankruptcy law. The timing is bad,"
says Susan M. Wachter, professor of real estate at the Wharton
School of Business."- BusinessWeek
We have heard
“Chapter 11” mentioned when people talk about bankruptcy (Recent
one was K Mart filing Chapter 11). What does that mean? Are
there different types of bankruptcy?
The United States Federal Bankruptcy
Code has provision for four bankruptcy filings:
- Chapter 7 – Liquidation
- Chapter 11 – Reorganization
- Chapter 12 - Adjustment
of debts of a family farmer with regular annual income
- Chapter 13 - Adjustment
of debts of an Individual with regular Income
The filing generally depends
on the person's financial situation. Reportedly, the most
common filing is Chapter 7. Companies, married couples and
individuals are allowed to file Chapter 7.
A debtor filing Chapter 7 is
essentially scrapping everything and starting over, hoping
for a clean financial slate. Basically what happens is that
once the filing is underway, an administrator or trustee is
appointed to maneuver the sale of the debtor's assets. This
does not necessarily mean that everything the person owns
is sold. Both federal and state laws allow for certain exemptions,
meaning that the debtor might get to keep some property, such
as his or her primary residence or personal items like clothing.
Once the debtor's assets are liquidated, the trustee pays
certain creditors a portion of the money raised. Obviously,
not all of the creditors receive money from the proceeds,
so many of those financial obligations are "forgiven,"
or discharged. Once someone has filed for bankruptcy under
Chapter 7, he or she cannot file again for seven years, and
debts that were not forgiven in a previous filing will not
be discharged in the next filing.
It is important to note that
there are certain debts for which the debtor will receive
no forgiveness. Alimony, child support, taxes and student
loans are not discharged under any bankruptcy filing. So,
if a lot of your debt falls into these categories, individuals
might be better off filing Chapter 13.
Chapter 12 and Chapter 13 are
basically the same filing, except that Chapter 12 is for family
farmers and Chapter 13 is for other individuals. As long as
you have a steady, reliable income, less than $269250 in unsecured
debt and less than $807750 in secured debt, you can file Chapter
13. Once the filing is made, the debtor is assigned a trustee.
The debtor and trustee develop a proposal for a repayment
plan. The court decides whether to accept or alter the plan
or dictate another repayment plan altogether. Once the plan
is decided upon, it can last anywhere from three to five years.
You may be wondering why someone
would file for Chapter 12 or 13 instead of Chapter 7. There
are a couple of reasons for this:
Under Chapter 12 and 13 filings,
debtors do not have to liquidate their assets -- they actually
get to keep everything, not just the items that meet the legal
exemption. In most Chapter 12 and 13 cases, the debtor is
repaying only a percentage of what he or she actually owes
-- sometimes as little as 30 cents to 50 cents on the dollar!
Chapter 11 bankruptcy is very
similar to Chapter 13. The main difference is that there is
no limit regarding the amount of money owed by the debtor.
Originally only intended for large corporations, individuals
can now file Chapter 11 as well.
Filing for bankruptcy is not
to be taken lightly. It affects your credit rating for many
years. The decision to file is best made under the counsel
of a financial planner and/or a legal representative.
Links of interest:
Wrong with This Picture?: Polaroid's passage through
Chapter 11 exposes how bankruptcy can give debtors too much
since Polaroid Corp. slipped ignominiously under Chapter
11 bankruptcy protection in October 2001, it has been portrayed
as a textbook case of how bankruptcy proceedings can help
a failing company emerge with a promising future. - CFO
Advice; Bankruptcy from FirstGov Each year more than
1,200,000 Americans file for protection under the federal
bankruptcy laws, according to the American Bankruptcy Institute.
Some are credit abusers or are financially irresponsible.
But average working families who try to pay all of their
bills can find themselves in financial trouble, too. The
sudden loss of a job, medical bills, a divorce or even a
natural disaster can quickly wipe out a life’s savings.
For many, bankruptcy provides a second financial chance......