Bankruptcy Liquidation and Reorganization

Bankruptcy Liquidation and Reorganization

In this article we will discuss Bankruptcy Liquidation and Reorganization. Currently, the bankruptcy laws define situations in one of two ways, liquidations or reorganizations. Most people recognize bankruptcy as the Chapter 7 liquidation. This type of bankruptcy allows the debtor to choose how to treat their secured debts, and be able to wipe out most of their honestly incurred unsecured debt. Reorganizations require that money will be paid to creditors over a period of time. Reorganizations are divided into commercial and consumer subsets. Commercial reorganizations include municipalities (Chapter 9); corporations, other business entities, or persons who do not qualify for other types of reorganizations (Chapter 11) or; family farm reorganizations (Chapter 12). Chapter 13 is primarily for consumer debt, and requires a repayment plan for certain debts. It is officially titled “Adjustment of Debts for Individuals with a Regular Income.” The Chapter 7 liquidation acts as a starting point for all types of bankruptcy. Accordingly, most of the following discussion will be focused on the common elements, and the specific options offered by each of the reorganizations will be briefly touched upon at the end.

Bankruptcy Liquidation and Reorganization are started the same way. All forms of bankruptcy are started by the filing of a bankruptcy petition. A petition can be filed by an individual, a husband and wife, or an authorized legal entity, such as a corporation, partnership, etc. The Chapter 7 liquidation divides a petition filer’s life into assets and liabilities, and then looks to the petition filer’s income and expenses to see if a fair evaluation of the debtor’s budget could result in a meaningful payment to creditors in a Chapter 13 adjustment of debts. Assets are defined by law as items owned by the petition filer. By liabilities, the law means things that a petition filer owes, or their debts. Liabilities are comprised of the petition filer’s debts and are categorized into three types. The first category is priority debt. Priority debt consists of obligations such as wages and benefits owed by an employer to employees, security deposits held by landlords, certain farming and fishing warehousing concerns, and federal, state, and local taxes. The second category is secured debt. Secured debt consists of items which have been pledged as collateral for the repayment of an indebtedness in a legally valid and recognized way, such as a mortgage recorded in the proper county to secure the repayment of a loan for the purchase of a house, or a lien on a car title to secure a loan for the purchase of the vehicle. The third category is unsecured debt. Unsecured debt consists of everything else, such as credit cards, medical bills, signature loans, etc. Bankruptcy Liquidation and Reorganization are very in-depth and require the consultation of a professional! Please feel free to contact us below to start your consultation today!

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By: Joel S. Treuhaft, Esquire