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Bankruptcy is a common word yet the process behind it can be surprisingly complex. But worry not! We are here to explain it to you. 

Bankruptcy: Overview

Sometimes people and businesses take on too much debt that has then be repaid. There are many reasons why a person or business may not be able to repay their debts in full. There were more than 500,000 bankruptcy filings in the US in 2020. The bankruptcy process is designed to allow people who are unable to repay their debt to have some breathing room while still granting creditors the opportunity for repayment. 

How does it work?

For Debtors:   First, you must make sure that you meet the requirements for filing for bankruptcy. Not everyone can just file for bankruptcy to avoid paying their debts. You must first file a petition with the federal court and ensure that they meet all the requirements such as credit counseling in the last 180 days. Then the process will vary depending on what chapter bankruptcy you file. A bankruptcy is considered to be discharged when the proceedings are complete. The discharge only occurs after the debtor has satisfied all requirements of the bankruptcy agreement including repayment plans.  All debt on a discharge order is wiped out and all creditors are barred from attempting to collect a discharged debt.

For Creditors:  In almost all cases, you must file a Proof of Claim (Official Form B410) prior to the Bar Date set by the court in order to have the chance to reclaim any/all of what you are owed.  The Proof of Claim form asserts the amount(s) you are owed and provides supporting documentation for your claim.  The nature of your claim and whether your claim is secured or unsecured are among the factors that determine if/when your claim may be paid as part of the bankruptcy discharge.  Once a debtor has filed a bankruptcy petition with the court, the “Automatic Stay” goes into effect and collection activities must stop.

What are the most common types of Bankruptcy?

The most common types of bankruptcy are Chapter 7 and Chapter 13 for individuals and Chapter 11 for companies.

  • Chapter 7 bankruptcy, also known as liquidation, is the most common type of bankruptcy for individuals. The court appoints a person, called a trustee to take charge who then sells all non-exempt property. The money from the sale is then split among the creditors so that they may recoup some of their losses. This is oftentimes only used at the last resort. 
  • Chapter 13 bankruptcy, also known as the wage earner’s plan, allows individuals with enough income to come up with a repayment plan to repay their debts within 3-5 years.
  • Chapter 11 bankruptcy is typically used by big businesses and is complicated and expensive. A business proposes a reorganization plan that allows it to continue operating while repaying its debts. 

What are the other types of Bankruptcy? 

  • Chapter 15 bankruptcy is used when the cases span borders.  It is filed by foreign debtors as an ancillary proceeding in addition to a primary bankruptcy action pending in their home country. 
  • Chapter 12 bankruptcy is used by family farmers and fishermen.
  • Chapter 9 bankruptcy is used by municipalities and political subdivisions. 

Go here for more details on the different types of bankruptcies.

What are some common bankruptcy terms?

  • Lien: A lien is a legal right for a creditor to take possession of an asset belonging to a debtor until the debt is repaid. If the repayment is not completed, the creditor may be able to seize the asset.  If you buy a car with a bank loan, the bank is granted a lien on the car or a legal right for the bank to take possession of the car. If you do not repay the bank loan, the bank can execute the lien and take the car. 
  • Replevin: A legal action for plaintiffs who have had their assets unlawfully withheld as well as any damages incurred during that period. For example, a bank may file a replevin action against you to repossess your car if you fail to make payments on your car. 
  • Foreclosure:  A legal process when a lender takes possession of and sells an asset belonging to a borrower who fails to repay. For example, if you fail to make payments on your home loan, the bank can foreclose on your home, seizing it and selling it to recoup some of their losses. 

If you are a creditor and wish for expert legal advice on your bankruptcy claim, we can help. We are experts at studying the facts of your claim to see how we can get it prioritized. In fact, we believe so strongly in our ability to maximize your recovery that we are willing to bet our fees on doing so. Write to us here.

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