Overview of Bankruptcy

Overview of Bankruptcy Under the U.S. Constitution, bankruptcy is a matter of federal law, and the Bankruptcy Reform Acts of 1978 and 1984 presently govern it. Generally, individuals, corporations, and associations whose assets are less than their liabilities can fie for bankruptcy. The Bankruptcy Code provides for the following major types of bankruptcy proceedings: Chapter 7, or liquidation, requires that a trustee sell off the debtor’s property to pay the debts owed to creditors. Under federal and state exemptions, an individual debtor is allowed to keep a modest amount of household property. Declaration of Chapter 7 bankruptcy may be a voluntary act on the part of the debtor or may be the result of a lawsuit filed by the creditors. The trustee is elected by the creditors or appointed by a court. The debtor must also pay legal and accounting fees. This is the most common form of bankruptcy. Chapter 13, the second most common form of bankruptcy, allows individuals or proprietorships with a regular income to pay off their creditors with the assistance of a trustee. A debtor enters this form of bankruptcy voluntarily. The creditor’s claims are frozen until a plan is presented to pay off the creditors from income. If the court and creditors agree, debts may be stretched out or compromised. This might prevent the seizure of the debtor’s property and allow the business to keep operating. Chapter 11 applies to corporations and allows management or a trustee to continue a company’s operations while creditors’ claims are frozen pending approval of a plan. With court approval, the plan can modify or forgive debts, recapitalize a corporation, provide for mergers or takeovers, or dispose of assets. Many firms wait too long to file for Chapter 11 bankruptcy and few, approximately 25 percent, manage to survive.

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