Types of Bankruptcy Laws | What is Bankruptcy Law? | Business Lawn |Management Notes | Non-Dischargeable debt
What is Bankruptcy?
When the business organization or we can say the person involved in the business is unable to pay the outstanding debts then the condition is considered as bankruptcy. By the proceeding of bankruptcy, creditors are provided with a repayment opportunity and the business organization or the individuals are made free from their debts (Lukason & Hoffman, 2014).
The cases of bankruptcy are handled in the federal court where the rules are outlined in the U.S. Bankruptcy Code. Though bankruptcy allows the person or the individual to have a fresh start but the situation of the bankruptcy condition will remain in the credit reports for many years which will create difficulties while borrowing money in the future.
Major Types of Bankruptcy
The major types of bankruptcy proceedings within the U.S. bankruptcy code which are referred by several chapters are described below:
Major Types of Bankruptcy, Purposes and Procedures
|Types of Bankruptcy||Purposes and Procedures|
Chapter 7 Bankruptcy
|The main purpose of filing this bankruptcy is disposing their unsecured debts which may consist bills of credit card, medicals, etc. This type of bankruptcy is generally filed by the individuals or the business organization with few or no assets.|
Chapter 9 Bankruptcy
|The main purpose of filing this bankruptcy is reorganizing, remaining in market (business) so that they can be profitable once again. This bankruptcy filing helps the company in making profitability plans, cutting costs as well as in increasing revenue from various ways.|
Chapter 10 Bankruptcy
|Because of the complexity of this type of corporate bankruptcy, it was retired in 1978 and the key parts were revised and incorporated in the chapter 11 bankruptcy. The main purpose of filing this bankruptcy is to reorganize financially distressed companies.|
Chapter 11 Bankruptcy
|Chapter 11 bankruptcy which is also known as reorganization bankruptcy which involves reorganization of assets, debts and reorganization of business affairs of debtor. This is the most complex and expensive form of bankruptcy proceedings therefore it is important to carefully analyze and explore all the available possible opportunities.|
Chapter 12 Bankruptcy
|This bankruptcy was mainly for the Farmers and fisheries .The main purpose of filing this bankruptcy is to allow proprietors of farms and fisheries to reorganize their debts and finances while still maintaining assets ‘ownership (DOWNEY, 2020). There are certain criteria for filing this type of bankruptcy which includes that the married couple must have more than 50% of their income from farming then only they can file for this type of bankruptcy.|
Chapter 13 Bankruptcy
|This is the type of bankruptcy where through the supervision and approval of the courts, reorganization of the finances. The parties who can file this type of bankruptcy include individuals, married ones even if they are self-employed or they work for unincorporated business.|
Chapter 15 Bankruptcy
|The main purpose of filing this bankruptcy is fostering a cooperative environment in the international insolvencies. Simply, we can say that this type of bankruptcy promotes cooperation among the courts in the United States, Representatives that are appointed and the foreign courts (HAYES, 2020). This type of bankruptcy makes legal proceeding more transparent and fair for the creditors and debtors especially for the international companies.|
Debtor’s assets and liabilities during Bankruptcy
During the process of bankruptcy, the debtor should consult to the attorney so that it is easy to analyze whether any assets can be taken by the debtor during the process of bankruptcy (Dahiya, John, Puri, & Ramı́rez, 2003). The main thing is that depending upon the type of the bankruptcy proceedings what happens (liquidated or reorganized) to the debtor’s assets and liabilities is understood.
For example, in case of Chapter 7 Bankruptcy proceedings, the company goes for liquidation which indicates that all the remaining assets are sold out to satisfy the secured and unsecured creditors. But in case of Chapter 11 or 12 Bankruptcy, the company goes for the reorganization where the debtors develop certain plan and procedures to repay the debts so that he/she can be discharged from the bankruptcy.
Non-Dischargeable debt during Bankruptcy
Those debts whose elimination are not possible or are not discharged even through the Bankruptcy proceedings are called Non-dischargeable debts. The main reason of discharging debt during the bankruptcy is that you will not be personally held liable for those debts. The Chapter 7 bankruptcy and Chapter 13 bankruptcy highlights about the discharge of debts during the bankruptcy proceedings.
There are several categories of non-dischargeable debts which are given below:
- Student’s loans.
- Alimony or say fund for child support.
- Many of the taxes.
- Debt that arises due to accident (or death) because of intoxicated driving, etc.
- Tax advantaged retirement related debts.
- Debts that have been failed to discharge in the filing of the bankruptcy.
Some of the debts that are not discharged during the Chapter 7 and Chapter 13 of the Bankruptcy proceedings. The main goal of filing both of the chapters is to be free from the debts so that a fresh start can be done but not all the debts are eligible to be discharged.
In order to be the non-dischargeable debt, it is required for the creditor in successfully challenging your discharge (O’Neill, 2020). There will be a hearing in the court that gives the opportunity to creditor and the bankruptcy filer to present their arguments. But in case if the creditor is unable to object or the points of creditors are disagreed by the court then the debts gets discharged.
For example, credit card purchases of the luxurious items during the ninety days by the single creditor, debts that is incurred under false pretenses, etc.
Recommendation made to creditor to protect itself from a debtor filing Bankruptcy
It is very important to make sure that all the valid claims of the creditors are fulfilled before the debts are discharged to the debtors (Armour & Cumming, 2008). In the bankruptcy proceedings not all the creditors are treated equally, the creditors are treated on the basis of the priority of their claims like priority claims as well as the secured claims.
The creditor must consult an experienced debt collection attorney and must react proactively to have a successful collection of the debts (Mateos-Planas & Seccia, 2006). Creditors must be aware and understand bankruptcy code because it protects the creditors as this code helps to avoid the debtors from preferring one creditor over another.
Consequences of filing Bankruptcy
Though bankruptcy helps you to be free from the debts and have a fresh start but there are various consequences that might result when the person or the company files for bankruptcy. Some of the major consequences of filing bankruptcy are as follows:
- You will lose your property because of the bankruptcy proceeding while selling the assets to pay back the debts.
- For several years, your credit report will reflect negative information which might hamper the way people will view you in the nearby future while giving credit. This depresses the credit score of the person(Agarwal & Liu, 2003).
- Another consequence of filing bankruptcy is that it makes your personal financial information accessible to the general public and ultimately your privacy is affected because everyone including your family, friends, employers, clients, etc. will be able to know how much money you have in your bank account(Chomsisengphet & Elul, 2006).
Some of the Companies that filed for Bankruptcy
The following listed companies have recently filed for the Bankruptcy after the pandemic hit them very hard.
The company was considered to be the biggest seller of the musical instruments in the United States. The company tried many ways to fight against this pandemic like online music lessons, etc. but still was unable to improve its falling sales. Therefore the company has filed for the chapter 11 bankruptcy because the stores were closed and there was huge competition for selling goods online going on.
The Company was already struggling before the pandemic where several of its subsidiaries filed for the bankruptcy already. The company has officially filed for the bankruptcy in the mid-November because the pandemic has hit the airline industry drastically makes the routes limited.
In the late September, the company filed for Chapter 11 Bankruptcy because of the massive decline in the dine-in business and has closed 5 restaurants permanently. Though there are100 of locations but the other restaurants will be unaffected because they are franchise owned.
Lord & Taylor
This is the nation’s oldest departmental store which has filed for chapter 11 bankruptcy in the early of the August 2020 after the pandemic affected them so hard.
Agarwal, S., & Liu, C. (2003, March). Determinants of credit card delinquency and bankruptcy: Macroeconomic factors. Journal of Economics and Finance, 27(1), 75–84.
Armour, J., & Cumming, D. (2008, August). Bankruptcy Law and Entrepreneurship. American Law and Economics Review, 10(2), 303–350.
Chomsisengphet, S., & Elul, R. (2006, January). Bankruptcy exemptions, credit history, and the mortgage market. Journal of Urban Economics, 59(1), 171-188.
Dahiya, S., John, K., Puri, M., & Ramı́rez, G. (2003, July). Debtor-in-possession financing and bankruptcy resolution: Empirical evidence. Journal of Financial Economics, 69(1), 259-280.
DOWNEY, L. (2020, December 1). Chapter 12. Retrieved from Investopedia: https://www.investopedia.com/terms/c/chapter12.asp
HAYES, A. (2020, September 15). Chapter 15 Bankruptcy. Retrieved from Investopedia: https://www.investopedia.com/terms/c/chapter-15.asp
Lukason, O., & Hoffman, R. C. (2014, October 22). Firm Bankruptcy Probability and Causes: An Integrated Study. International Journal of Business and Management, 9(11), 80-91.
Mateos-Planas, X., & Seccia, G. (2006, November). Welfare implications of endogenous credit limits with bankruptcy. Journal of Economic Dynamics and Control, 30(11), 2081-2115.
O’Neill, C. (2020, June 12). Debts That Cannot Be Discharged in Bankruptcy. Retrieved from The BankruptcySite: https://www.thebankruptcysite.org/nondischargeable-debts
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