Filing for Bankruptcy Chapter 7, 11 or 13
Before considering the differences between the three, let’s take a minute to review the reasons why an individual, a partnership, or a corporation would find itself having to file for bankruptcy. In all cases, it’s usually a situation where cash outflows are larger than cash inflows. No matter how simple or sophisticated the financial dealings of the petitioner, boiled down to the essentials of the case, it’s usually an instance where the petitioner has assumed financial obligations which far outweigh the income available to cover those obligations.
Caught between the proverbial rock and a hard place, most petitioners turn to the Bankruptcy Court (a federal court) as a last resort. The U.S. legal system allows for petitioners to seek relief from the claims of their creditors through bankruptcy. Every entity–individual or business–has the right to do so once every seven years. While some would never even consider filing for bankruptcy, others have regularly found themselves headed for the court over and over again in order to put their financial houses in order.
As mentioned earlier, petitioners have to indicate the type of bankruptcy relief they’re seeking. That’s why bankruptcy Chapter 7, Chapter 11, or Chapter 13 are used to distinguish among filings. Each allows for a certain type of relief for the petitioner.
A Chapter 7 bankruptcy filing indicates the petitioner (usually an individual) is asking for liquidation. Put another away, it means that whatever assets the petitioner possesses will be sold and the proceeds used to pay off creditors (sometimes for pennies on the dollar). It’s important to note that in a Chapter 7 filing, individuals are able to keep some of their possessions. Each state has identified certain exemptions which a petitioner can use to hold on to certain possessions. They include, for example, tools used to work in a trade, homes, household furnishings, etc.). Therefore, depending upon the state where petitioners reside, they’ll be allowed to spare certain of their assets from being sold off.
A Chapter 11 bankruptcy filing usually occurs when a business, especially a corporation, is filing for bankruptcy. Once again, the petitioning business or corporation has to list all of its assets. Those assets will be sold and the proceeds used to pay off the creditors of the business. Since in most cases the assets available for sale do not amount to enough to cover outstanding indebtedness 100%, creditors have to content themselves with receiving only a partial repayment of all the money owed them.
To handle the sale of assets, as well as to monitor the financial condition of a petitioner, the Bankruptcy Court appoints a trustee to oversee each case. Usually an attorney, the trustee’s responsibility is to keep the court informed of the particulars of a case, make sure that petitioners identify fully and completely not only all of the indebtedness they have, but also all of the assets which can be used to pay off that debt.
Unlike bankruptcy filings under Chapter 7 and Chapter 11, Chapter 13 bankruptcy filings ask the court essentially to have creditors back off and give the petitioner time to develop a plan to pay off outstanding debts. In other words, petitioners think (in most cases) that they can continue to operate on a sound financial basis, but due to an unexpected development, they find themselves temporarily short of funds to meet their obligations. Thus, with a Chapter 13 bankruptcy filing, the court can say to creditors (1) cease asking for payment for the time being, and (2) you’ll get your money once the petitioner has a chance to carry out a new financial plan approved by the court.
Recently, a number of big corporations in the United States, especially airlines, have resorted to bankruptcy in order to keep themselves afloat. While they are perfectly within their rights to do so, what some have found objectionable is a tendency on the part of some companies to use bankruptcy to jettison long-term outstanding obligations, such as pension plan payments.
While arguments can be made on both side of that issue, the fact remains that bankruptcy is an integral part of the U.S. legal system. And entities–either individual or corporate–which find themselves in financial difficulties are able to obtain relief–either temporary or permanent–from their financial woes.
