Foreclose Online
Bankruptcy is a legally declared inability or impairment of ability of an
individual or organizations to pay their creditors. Creditors may file a
bankruptcy petition against a debtor ("involuntary bankruptcy") in an effort to
recoup a portion of what they are owed. In the majority of cases, however,
bankruptcy is initiated by the debtor (a "voluntary bankruptcy" that is filed by
the bankrupt individual or organization).
The primary purpose of bankruptcy is: (1) to give an honest debtor a "fresh
start" in life by relieving the debtor of most debts, and (2) to repay creditors
in an orderly manner to the extent that the debtor has the means available for
payment. Bankruptcy allows debtors to be discharged from the legal obligation to
pay most debts by submitting their non-exempt assets, if any, to the
jurisdiction of the bankruptcy court for eventual distribution among their
creditors. A bankruptcy case is initiated by the filing of a petition, which
contains the Debtor's financial information. A married couple may file a joint
petition. Though in a technical sense the filing of a joint petition initiates
two separate bankruptcy cases (and estates), the cases and estates are usually
consolidated and treated as one.
There are two common forms of bankruptcy: liquidation and reorganization. In the
United States the law provides for one liquidation chapter (chapter 7); all
other chapters are for reorganization (chapter 9- municipalities, chapter 11-
businesses or individuals, chapter 12- family farmers, chapter 13- individual
"wage earners".) Upon the filing of the bankruptcy petition, the Debtor's assets
constitute the bankruptcy "estate". With the notable exception of a case under
chapter 11, a Trustee is appointed to oversee the Debtor's estate, to evaluate
claims and perform other functions. In certain instances a Trustee can be
appointed to a chapter 11 case.
In a liquidation bankruptcy, the Debtor's nonexempt (ie, legally unprotected)
assets are sold off to satisfy creditor claims. This is referred to as
"administering" the Debtor's estate. The Creditors with timely filed and valid
claims participate in a pro rata distribution of the proceeds obtained through
the liquidation. The distribution is based on a system of priorities, in which
certain classes of claimants are given priority over others. A liquidation case
in which no liquidation occurs, and thus no assets are administered for the
benefit of creditors, is generally referred to as a "no asset" case.
A reorganization bankruptcy is a bankruptcy in which a debtor
reorganizes/restructures assets and debts. Individuals may initiate a
reorganization bankruptcy in order to retain assets and pay creditor claims out
of the individual's income. However, reorganization bankruptcies can involve an
"orderly liquidation" of some or all of the Debtor's assets. A reorganization
bankruptcy usually allows the Debtor to carry on while satisfying creditor
claims (in whole or part).
Businesses may enter a reorganization bankruptcy in order to survive insolvency
due to creditor claims exceeding the ability of the business to satisfy them.
The basic process involves a business reducing each creditor's claims to allow
partial payment in order for the business to carry on with its daily commercial
activity.
During the pendency of a bankruptcy preceding the debtor is protected from most
non-bankruptcy legal action by creditors through a legally imposed stay.
Creditors cannot pursue most types of lawsuits, garnish wages, or attempt to
compel payment.