Chapter 11 Bankruptcy

Chapter 11 bankruptcy is sometimes referred to as “reorganization.” It usually involves a partnership or corporation. The debtor presents a repayment plan to the bankruptcy court. If it’s approved, the business is able to stay open, which is usually better for the creditors and everyone involved.

Like other types of bankruptcy, Chapter 11 is initiated when the debtor files a petition with a federal court. The petition can be voluntary or involuntary. The debtor must provide all information pertaining to assets, liabilities, income, expenditures, contracts and leases, and financial statements. They must also prove they’ve been to an approved credit counseling agency in the past 60 days. The debtor receives protection from his creditors as soon as the petition is filed. They keep their possessions and control their assets while they prepare a reorganization plan. The type of corporation effects how the bankruptcy is handled.

A corporation is separate from its owners, the stockholders. The personal assets of the stockholders are not at risk. Their risk is limited to the amount of their investment. A sole proprietorship is the opposite. The owner or debtor invests their personal assets in the business. It’s difficult to separate personal from business. Typically there’s a personal (Chapter 7 or 13) and business bankruptcy.

Similar to corporations, partnerships exist separate from the partners. There are two types of partnerships: general and limited. With a limited partnership each partners risk is limited to the amount of their investment. But with a general partnership the partners have unlimited personal liability.

After the debtor presents a repayment plan to the bankruptcy judge, it can be confirmed, dismissed or converted to a Chapter 7 or 11. In some situations a trustee is appointed. In others the court allows a representative of the company to handle the case. Creditors are notified and can attend the hearing. The debtor must answer questions under oath about their debt. A Chapter 11 bankruptcy is more complicated than Chapter 7 or 13. There’s more work, more people involved, more deadlines, more paperwork and more possible outcomes.

Legal advice is recommended when filing a Chapter 11. Creditors are classified as secured, unsecured, general unsecured and equity security. This determines in what order and how much they are paid back.Certain debts, like child support, taxes, education loans, legal payments resulting from law suits, etc., are excluded from the bankruptcy. Once the debtor has paid off all debt agreed to in the reorganization plan the bankruptcy is discharged. Bankruptcy definitely affects your credit. Afterward it takes time to improve your credit score. Bankruptcy can be a good decision. It gives a debtor the opportunity to start over. The best thing to do if you have to file bankruptcy is to make sure all payments after the bankruptcy are made on time.

Margaret Norton is a Person Life Coach/Writer/Speaker who resides in St. Peters, Mo.

(photo credit: thepresidentofcuba)

April 10th, 2009 by admin | Posted in Business | (0)