If you’ve experienced financial hardship — whether as an individual or through your business — you have a number of options, including credit counseling and debt restructuring. However, under certain circumstances, filing for bankruptcy may be your best option. If you file for Chapter 7 bankruptcy, as an individual or an organization, many of your assets may be sold to raise cash to pay off creditors, but much of your outstanding debt may be forgiven and the process can be finished in six months. Or, filing for Chapter 11 (for organizations) or Chapter 13 (for individuals) bankruptcy will allow you to continue operating your business, or keep your assets, as your debts are restructured and paid off over time, generally three to five years.
All Bankruptcies Are Under Federal Jurisdiction
In any case, in the United States, your case will be brought before a bankruptcy court. These are federal courts functioning as units of federal district courts, which have exclusive jurisdiction over all cases arising under the bankruptcy code. State courts have no jurisdiction over bankruptcy cases. In court, the presiding judge, or “bankruptcy judge,” decides on all matters relating to a bankruptcy filing, including whether a debtor is eligible to file for bankruptcy and whether the debtor may be discharged of debts.
However, much of a bankruptcy proceeding is administrative in nature and takes place out of the courtroom. In many cases, the court appoints a trustee to oversee the administrative aspects of the case. Procedural aspects of the case are governed by the Federal Rules of Bankruptcy Procedure, which are often supplemented by local rules established by particular bankruptcy courts. If you are filing for Chapter 7 bankruptcy, you may not have to appear in court at all, unless an objection is raised. Chapter 11 and Chapter 13 filers may have to appear before the judge only once, in a meeting to confirm the specified debt restructuring plan. However, debtors will have to appear at a meeting including his or her creditors, which typically takes place at the offices of the designated trustee. These meetings are called “341 meetings,” because it is Section 341 of the Bankruptcy Code that requires a debtor to be present before creditors, allowing creditors the opportunity to question the debtor (and the trustee) about the proposed repayment or restructuring plan.
Chapter 7 Bankruptcy and the Trustee’s Role
Chapter 7 bankruptcies always involve a trustee, who assumes control over the debtor’s assets, converts them to cash, and distributes the cash to creditors. The entire process is supervised by the bankruptcy court. The debtor retains the right to retain certain property, including his or her residence. If there are still outstanding debts after all the eligible assets have been sold off and the proceeds distributed, the debtor may then be released from personal liability for the remainder, at the discretion of the judge.
Chapter 13 Bankruptcy and the Individual’s Debt Repayment Plan
Chapter 13 bankruptcies are designed for individual debtors who still have a regular source of income; the debtor formulates a debt repayment plan and presents the plan to the bankruptcy court. Chapter 13 allows a debtor to keep his or her assets, and to pay back debts over an extended period of time. If the bankruptcy judge approves the repayment plan, payments are then made to creditors, usually through a trustee, over time. The debtor must complete all the agreed payments before he or she can be discharged of debt by the court.
Chapter 11 Bankruptcy and the Organization’s Reorganization and Debt Restructuring
Chapter 11 is similar to Chapter 13, except that it applies to organizations rather than individual debtors. An organization in financial difficulty will devise a reorganization plan, including debt restructuring, and present the plan to the court for approval. The debtor organization must also prepare a disclosure statement for creditors, allowing creditors to evaluate the plan. Although input from creditors is sought, the decision to approve or reject the restructuring plan rests with the judge. In the meantime, the company filing for bankruptcy may continue to operate, hopefully emerging from bankruptcy with a reduced debt load and more viable business structure.
There are other types of bankruptcy for specific categories of debtors or debtor organizations, all of which must likewise proceed through bankruptcy court. And although the court must consider the interests of creditors, ideally the court will only approve a plan that is fair to all parties, in which creditors will see at least most of their money repaid while the debtor has a chance at a fresh start.
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