In recent past, we have come across too many cases of world leading organizations filing for bankruptcy following the global recession which was almost as vigorous as the Great Depression of 1929. Studying some of these cases of bankruptcy, we have come to a conclusion, that anyone can go bankrupt. But bankruptcy does not mean the end of the world. A person who has gone bankrupt can file it in such a way that he might have the chance to start afresh.
Bankruptcy-Understand The Basics
Bankruptcy is the situation in which the financial condition of a person or organization is such that he is not able to pay back the debts he has. The ideal step to be taken by that person or organization is to file for bankruptcy to the government. This gives him a legal status to this indebted condition and takes away the status of insolvency from him.
Filing A Bankruptcy
As stated at the beginning of this article, anyone can go bankrupt due to ill-fated reasons. Thus to avoid any bitter situation, every person and organization should have a clear cut view on this subject. First and foremost, appointing a bankruptcy attorney is a must. Even though there is little chance of going insolvent in terms of debt, prevention measures are always welcome. A bankruptcy attorney helps you with filing under the appropriate bankruptcy chapter as there is more than one chapter under the Bankruptcy Code in US law. But it is most advisable to file a bankruptcy under Chapter 7 or Chapter 11.
Chapter 7 In Bankruptcy
Chapter 7 so far has been the most commonly filed bankruptcy chapter in US law. When a business or individual fails to pay the debts to his creditors he files for Bankruptcy in a federal court under Chapter 7. Once the filing is done, the court immediately employs a group of Chapter 7 trustee to investigate the financial affairs of the business or the individual. In case of a business, the operation is ceased instantaneously unless it is recommended by the trustees to continue. If a large business has gone bankrupt, then the entire division can be sold out and the profit gets dispersed among creditors. The business entity will then cease to exist as a whole. In case of an individual going bankrupt, the trustee board will have the power to sell all the non-exempt property of the debtor and dole out the money among the creditors.
Now there should be a clear idea regarding the Exempt and Non-exempt property. Federal court justifies some belongings of an individual under exempted property which cannot be sold and will be retained by the individual. These assets include one limited valued motor vehicle, absolute necessary clothing, basic household goods, furniture, appliances, limited valued jewelries, pensions if any, damages awarded for injuries, a portion of the equity when the debtor’s home is sold and social welfare benefits. The non-exempted assets are expensive musical instruments (unless there is a chance that the debtor might use that instrument further to sustain himself), any family antiques or valuables carrying family legacy, cash, stocks or bonds, if there is a second car or home. Famous cases of Chapter 7 filings are Ford Motors, Delta Airlines, Concesco and Trump international as businesses, while Abraham Lincoln and Mark Twain as individuals.
Chapter 11 in Bankruptcy
When filed bankruptcy under Chapter 11, you have some fresh air of relief. Once this chapter is filed, the government or the federal court appoints a board of trustees depending on the region of the filing. These trustees investigate the financial condition of the individual or business and arrange for a meeting between the debtors, creditors and the government. If the government finds the entity trustworthy enough, it bails the business or individual out by arranging for some new creditors, who under the protection of the state, loans the entity some asset to stay afloat or continue business. Any profit under this new money supply will be first distributed to the old creditors, next to the newer creditors and then the government. The entity cannot claim any profit under its name unless all the debts are completely repaid. Chapter 11 is always a better option for filing as it helps the entity to borrow money later on after the repayment is done. But in case of Chapter 7 there is hardly any opportunity left for the debtor to borrow further assets. Recent cases of Chapter 11 filings are Crysler, Morgan Stanley, and Lehmann Brothers.
Even if you do not need to file bankruptcy, keep a regular check on your property and its expenditure. Prevention is always better than cure. But in case you reach the situation where you are compelled to file for bankruptcy, please use the information gained from this article to your advantage.
Go Broke Or Stay Afloat- An Insight Into Filing Chapter 7 and Chapter 11 Of Bankruptcy Code – Guest post by John Szabo, personal finance, marketing and business writer at WallaceAPC, the best company in tax preparation Los Angeles wide.