Chapter 11 Bankruptcy

Chapter 11

A Chapter 11 bankruptcy is filed by businesses and is quite similar to a Chapter 13.  A Chapter 11 is available for individuals, but it is generally used by businesses to reorganize their debts and dealings so that they can be more financially solid.

When a troubled business is unable to service its debt or pay its creditors, they can file with a federal bankruptcy court for protection under either a Chapter 7 or a Chapter 11 bankruptcy. 

In a Chapter 7 bankruptcy, the business must cease operation and a trustee will sell all its assets and distribute the proceeds to the business’s creditors ratably in accordance with statutory priorities.

A Chapter 11 filing, on the other hand, is usually filed in an attempt to stay in business while a bankruptcy court supervises the reorganization of the company’s contractual and debt obligations.  The court can grant complete or partial relief from most of the company’s debts along with its contracts so that the company can make a fresh start.

Often, if the company’s debts exceed its assets, then at the completion of the bankruptcy, the company’s owners or stockholders all end up with nothing.  All their rights and interests are terminated and the company’s creditors end up with ownership of the newly reorganized company in the hopes that it will eventually succeed financially as compensation for their losses.

So, in general, an individual bankruptcy will be under a Chapter 7 or Chapter 11.  It’s a big decision for you to make, but sometimes, it’s the only way you can “get out from under” and begin anew.

Before you resort to filing for a Chapter 7 or Chapter 11, consider the alternatives.  Creditors might be willing to settle their claim for a smaller cash payment, or they might be willing to stretch out the loan and reduce the size of the payments. This would allow you to pay off the debt by making smaller payments over a longer period of time. The creditor would eventually receive the full economic benefit of its bargain.

Occasionally, you may “buy time” by consolidating your debts; that is, by taking out a big loan to pay off all the smaller amounts of debts that you owe. The primary danger of this approach is that it is very easy to go out and use your credit cards to borrow even more.

In that case, you end up with an even larger total debt and no more income to meet the monthly payments. Indeed, if you have taken out a second mortgage on your home to obtain the consolidation loan, you might lose your home as well.

When there really is no other way out, you’ll need to file for a Chapter 7 personal bankruptcy.  Try looking at it in a positive light, however.

There are some advantages to filing for bankruptcy.  By far the most important advantage is that debtors may obtain a fresh financial start. Consumers who are eligible for Chapter 7 may be forgiven (discharged from) most unsecured debts.

A secured debt is one which the creditor is entitled to collect by seizing and selling certain assets of the debtor if payments are missed, such as a home mortgage or car loan. With those two major exceptions, most consumer debts are unsecured. You may be able to keep (that is, exempt) many of your assets, although state laws vary widely in defining which assets you may keep.

Collection efforts must stop as soon as you file for bankruptcy under Chapter 7 or Chapter 13. As soon as your petition is filed, there is by law an automatic stay, which prohibits most collection activity.

If a creditor continues to try to collect the debt, the creditor may be cited for contempt of court or ordered to pay damages. The stay applies even to the loan that you may have obtained to buy your car.

If you continue to make payments, it is unlikely that your creditor will do anything. However, if you miss payments your creditor will probably petition to have the stay lifted in order either to repossess the car or to renegotiate the loan.

You cannot be fired from your job solely because you filed for bankruptcy.

Of course, there are disadvantages to filing for bankruptcy.  Since your bankruptcy filing will remain on your credit record for up to ten years, it may affect your future finances. A bankruptcy is a troublesome item in your credit record, but often debtors who file already have a troublesome history.

In one respect, bankruptcy may improve your credit records. Because Chapter 7 provides for a discharge of debts no more than once every eight years, lenders know that a credit applicant who has just emerged from Chapter 7 cannot soon repeat the process.

Research in this area has produced mixed results. A study by the Credit Research Center at Purdue University found that about one-third of consumers who filed for bankruptcy had obtained lines of credit within three years of filing; one-half had obtained them within five years.

However, the new credit itself may reflect the record of bankruptcy. For example, if you might have been eligible for a bank card with a 14 percent rate before bankruptcy, the best card that you can get after bankruptcy might carry a rate of 20 percent—or you might have to rely on a card secured by a deposit that you make with the credit card issuer.

There are a couple of ways you can go about filing for bankruptcy.  The most reliable is to secure a bankruptcy attorney and have them do it for you.  They are experts in this area and will often take care of everything for you including appearing in court on your behalf. 

They do charge a fee for this service, however.  That fee can range anywhere from $500 to $2,000 depending on your area.  Yes, it is odd that they’ll charge that high a fee to file a bankruptcy for someone who doesn’t have money in the first place, but many will accept payments.

You can also file the bankruptcy yourself.  There are many places on the Internet where you can download the forms you will need.  Be advised that they are often lengthy and in-depth, but they are fairly straight-forward when you take the time to fill them out completely.

Once you have the forms all filled out, take them to your local courthouse and pay the filing fee which is usually around $100 to $200.  You will receive a notice of a court date at which time you will need to show up and the judge will grant your request for bankruptcy. 

The bad part about filing yourself is that you have to contact all your creditors yourself to let them know that the bankruptcy has been filed.  You have to be very careful to list each and every one of your debts so they will apply under the discharge order.  If you miss even one, you will have to pay it after the bankruptcy is granted. Filing for bankruptcy might not be your only option.  One of the newest trends in achieving financial freedom and a good credit score is to secure the services of a credit counseling or debt consolidation company.