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Surviving the Emotional Effects of Bankruptcy


Bankruptcy is a legal process through which individuals and businesses in significant financial trouble can get relief from their debts. To some extent, bankruptcy also helps creditors.

The process begins with an assessment of the debtor’s assets and liabilities. This typically leads to an arrangement that permits the debtor to keep certain kinds of property while simultaneously mandating that other property be sold so that as many debts as possible are paid. Bankruptcy laws have specific rules about the order in which the debts must be paid. Any remaining debts are discharged unless they fall into certain classes such as orders for domestic support or debts incurred in a fraudulent way.

Filing for bankruptcy no longer carries the shame that it once did. Instead, the prevailing view is that bankruptcy provides an opportunity for a new financial start. It’s now widely recognized that the financial troubles that lead to bankruptcy frequently result from unexpected events such as job loss, business collapse, divorce, sickness or death. Bankruptcy is often the best solution to the debts caused by these situations. Thus, anyone who is facing considerable financial pressures should consult a knowledgeable NY bankruptcy attorney to discuss all available options.

Federal law principally applies to bankruptcy and, therefore, most bankruptcy cases are overseen by the federal courts. Bankruptcy is available under five different chapters of the U.S. Bankruptcy Code, which specifically apply to individuals, businesses, farmers, and municipalities. One chapter provides for liquidation while the other four are for reorganization.

Liquidation

The most common form of bankruptcy filing is under Chapter 7. This liquidation bankruptcy can be obtained by either individuals or businesses. Once a petition is filed seeking Chapter 7 relief, an automatic stay is issued. This stay puts an immediate end to most kinds of collections that are being sought against the debtor.

The court then appoints a bankruptcy trustee who is responsible for collecting the debtor’s nonexempt property, liquidating it, and delivering the proceeds to the creditors. If there are not enough assets to cover what the debtor owes, some of the creditors simply do not get fully repaid. If the debtor is an individual, the remaining debts are discharged, though there are exceptions such as student loans and child support. If the debtor is a business, its assets are completely liquidated. The business ceases to exist after the bankruptcy. Revisions to the U.S. Bankruptcy Code in 2005 have made it much harder for debtors to meet the eligibility requirements for liquidation. Debtors must now qualify under the so-called “means test” – which looks at the filer’s gross income in comparison to the state’s median income – before being allowed to liquidate.

Reorganization

Reorganization is preferable to liquidation in certain instances, such as when the debtor has continuing income that can be used to pay creditors. Four different chapters of the U.S. Bankruptcy Code are devoted to reorganization. Individuals with significant debts or businesses file for reorganization under Chapter 11. Individuals with lesser debts file for reorganization under Chapter 13. Chapter 12 controls reorganization for farmers, while Chapter 9 deals with municipalities.

As with liquidation, an automatic stay is issued once a petition for reorganization is filed. The debtor remains the owner of any assets and a bankruptcy trustee is appointed to draft a repayment plan that can last from three to five years. If the debtor successfully completes the plan and meets certain conditions, then any remaining dischargeable debt is cancelled. If the debtor defaults on the plan, the reorganization may be dismissed or may be converted to liquidation.

Involuntary Bankruptcy

Debtors in serious financial trouble that do not voluntarily file for bankruptcy may find themselves the subject of an involuntary bankruptcy petition filed by creditors. This legal remedy is available to creditors under either Chapter 7 or Chapter 11 and helps ensure that the debtor’s assets are distributed fairly. Involuntary bankruptcy can be filed either where there is a minimum amount of debt or a minimum number of creditors. Of course, creditors should only file involuntary bankruptcy petitions where there is actual foundation for the claim; severe penalties exist for improper filing.

Conclusion

Bankruptcy law exists for the protection of both debtors and creditors. Anyone that is considering filing for bankruptcy should contact an experienced NY bankruptcy lawyer who can explain the options and help choose a course of action. Debtors should retain legal counsel to aid them in getting out of debt and creditors should seek legal representation to assist them in collecting what is owed.