“A legal proceeding involving a person or business that is unable to repay outstanding debts. The bankruptcy process begins with a petition filed by the debtor (most common) or on behalf of creditors (less common). All of the debtor's assets are measured and evaluated, whereupon the assets are used to repay a portion of outstanding debt. Upon the successful completion of bankruptcy proceedings, the debtor is relieved of the debt obligations incurred prior to filing for bankruptcy.” (Investopedia, 2010)
Bankruptcy offers a business or individual a possibility to begin new journey by wavering the debts that can't be cleared while offering the creditors an opportunity to gain some extent of repayment that based upon what assets are existed.
In other word, the chance to file for bankruptcy can help the economy by providing business and persons a further opportunity and allowing the creditors with some extent of debt repayment.
Filings of Bankruptcy in the United States fall under several chapters of the Bankruptcy Code. There are six types of cases which can be categorized under the United States’ Bankruptcy Code. These types are following:
Chapter 7 is about the fundamental liquidation for businesses and individuals that is also famous as straight bankruptcy; it is the common and quickest type of bankruptcy.
Chapter 9 belongs to municipal bankruptcy that is the federal system for the resolution of municipal’s debts
Chapter 11 is about the reorganization and rehabilitation that is used principally by business debtors and for some extent by individuals with considerable assets and debts that is recognized as corporate bankruptcy, it is a type of corporate financial restructuring which normally allows companies to carry on their function while following the debt repayment plans
Chapter 12 is about the rehabilitation for fishermen and family farmers.
Chapter 13 is about the rehabilitation with a individuals’ payment plan who has standard income source; enable those individuals to develop a plan to pay back all or part of their dues; it is also known as Bankruptcy by Wage Earner.
Chapter 15 comprises with ancillary and other international cases that provide a method for handling the bankruptcy debtors and assists foreign debtors to clear their debts.
The general types of personal bankruptcy for persons are Chapter 7 and 13. Almost 65% of consumer bankruptcy filings are belongs to Chapter 7 cases. The Corporations and business filing comes under the umbrella of Chapters 7 or 11. (Robicsek, 2010)
Discussion on differences between the Bankruptcy Chapter 7 and 11
The important consideration is whether or not any individual wants to keep the business in action during and after the bankruptcy. Under the Chapter 7 the business is ended while according to the Chapter 11, one can carry the operations.
Chapter 7 comprises the benefits that allowing the individuals that what amounts required to clean the debts through discharge of the debts; while the Chapter 11 provides the opportunity of a reorganized business on healthier presence into the future.
One may paraphrase that bankruptcy is simply the method to get out of paying their debts. Bankruptcy itself has the complicated dimensions and it is not the easy way to have complete relaxation about their payable dues.
Chapter 7 belongs to the bankruptcies that fall under the category of “liquidation” bankruptcy. These types of bankruptcies can be filed by any type of business entity including individuals, partnerships and corporations etc.
If an entity (it could be an individual or organization) is filing Chapter 7, it must have the reason that they are not able to recognize their debts and are bound to sell their assets in order to clear the obligations. In that type of scenario, a trustee’s services is hired by the filer that is accountable for ensuring the assets, that are secured and available for sale, are sold and that the earnings from the transactions are given to the particular creditor that secured the purchase at first.
If the secured assets’ sales brings more money than what is payable to the secured creditors then the cash and assets are pooled and paid to those outstanding creditors who had given unsecured loans to the business entities or individual.
One of the key aspects about the people and organizations to file a Chapter 7 bankruptcy is to release the eligible debts/ obligations and provide themselves a new start. A defaulter who successfully files the Chapter 7 will have no accountability for the debts that is discharged but there are several types of debts that can’t be discharged, including college loans and all that type of loans that belong to child support, alimony and/ or a lien on assets (property). A release of debt under the category of Chapter 7 is only probable for individual debtors not for the business entities including partnerships or any type of company.
Once the case is filed with the court to commence the Chapter 7, the creditors must discontinue contacting with the debtor to pay their obligations.
An individual may be refuted the debt discharges under the Chapter 7 case; if the court discovers that the individual did not have any sufficient financial records, committed the perjury’s crime was incapable to explain the assets’ loss, hidden, damaged or illegitimately transferred property to try and shift it out from the estate, or unable to complete a financial management course as mandatory of all those debtors who are filing the bankruptcy. (Bankruptcyaccess, 2010)
Chapter 7 bankruptcy is also known as “T-Total Bankruptcy”. The Chapter 7 fees and its categories that are charged by the court are following:
Filing fee: $245.
Administrative fee: $39.
Chapter 11 bankruptcy falls under the category of “rehabilitation” bankruptcy. The business or individual both can file under the category of Chapter 11 or the creditors has the option to unwillingly file for the debtor in particular situations. The numbers of Chapter 11 bankruptcies are submitted by businesses entities rather than the individuals.
According to this type of bankruptcy, the debts are characterized to allow the business or persons a reasonable chance of repaying their obligations with peace of mind. The creditors get in touch to get different terms/type on any loans such as the interest rates may be lessened, the time period that one have to clear the debt may be expanded to make the monthly installment lower and flexible to manage. A trustee’s service is hired to manage the assets but nothing to be sold at that time period.
According to the Chapter 11 bankruptcy, one can’t get rid of his debts. One can simply reorganizing and altering the terms of the debt and preparing the plans to pay back properly and continuously via prospect earnings.
Furthermore, The Chapter 11 fees and its categories that are charged by the court are following:
Case filing fee: $1000.
Miscellaneous administrative fee: $39.
In the scenario where a business entity files Chapter 11, it is likely to continue their business operations properly. However, in the circumstance where the evidence /prove not possible, the business has the option to file under Chapter 7 and liquidate the assets. (Swanson, Marshall, Lokey and Norley, 2010)
However, one aspect is common in both the Chapters that is; if corporation is filing under these chapters, it is expected that the common shareholders will receive either no return or a little return on their investments.