Thursday, September 12, 2013

The Federal Bankruptcy Act

Individuals and businesses have the option to file for bankruptcy under the Federal Bankruptcy Act, usually called the Bankruptcy Code. There are three different types of bankruptcy, called Chapters. Each chapter provides its own legal and financial solution. Individuals can use Chapter 7 or 13, while businesses can use either Chapter 7, 11 or 13.
The different types of bankruptcy are based on different situations of the debtors. The Federal Bankruptcy Act has some features that can benefit the debtors, regardless which Chapter the case is filed under. One of these features is the automatic stay.  The stay stops the collections efforts of all the creditors.  The moment the bankruptcy petition is filed, all of the debtor's creditors have to halt their debt collection activities immediately, which includes repossession, foreclosures, lawsuits, letters, and phone calls.

Debt discharge is another important feature of the Federal Bankruptcy Act. It provides debt relief by wiping out debts permanently. A debt discharge applies to a particular amount depending on what chapter the bankruptcy case is filed under.

Wherever you are in the United States, you can file for bankruptcy as long as you satisfy the requirements. The bankruptcy proceedings occur in the U.S. District Bankruptcy Courts. The Bankruptcy Courts are organized based on the state boundaries. However, the bankruptcy law is regulated by federal judges because it is a federal law.

Chapter 7 bankruptcy cancels most of your debts. It mainly involves liquidation of your assets. Your nonexempt property at the time the bankruptcy petition was filed will be sold by the court-appointed trustee. The proceeds are then distributed to the creditors. 

The court will discharge most of the remaining debts you incurred before the filing. Because of this, Chapter 7 provides individuals an opportunity to start over by eliminating debt. However, if a company files for Chapter 7, the business will cease to exist once the case is over.  All the company's assets will be sold off and the remaining debts will be discharged by the court.

Chapter 11 bankruptcy allows businesses to restructure their business or debt. It is a very expensive and complex bankruptcy that requires a reorganization plan, which is subject to a court's approval. The business has to prove to the court that it can make sufficient money to pay its creditors through the restructuring.  Once a court confirms the Chapter 11 plan, the company will be allowed to continue its operations.  

Chapter 13 can be used by an individual or a business to reduce debt and pay creditors through a debt repayment plan. If the plan only pays part or some of the debts, the remaining unpaid amount will be discharged provided that the plan has been approved by the court. Chapter 13 plans normally take three to five years to complete.  One advantage of Chapter 13 filing to a business is that it would be able to continue with its operation under its present form.  Moreover, filing Chapter 13 bankruptcy can provide more time to pay off debts, and some of the debts can even be reduced with the court's permission.

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