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Bankruptcy


Bankruptcy is when a person or organization cannot repay its debts to its creditors.  When a debtor cannot pay its creditors, bankruptcy provides a statutory procedure by which a debtor obtains financial relief.  When a debtor files for bankruptcy, the debtor’s assets are either reorganized or liquidated, depending on under what chapter the debtor files for relief, for the benefit of the creditors.  Bankruptcy can be initiated by a debtor, voluntary bankruptcy, or by a creditor, involuntary bankruptcy.

Chapter 7 bankruptcy is the most common type of bankruptcy proceeding, and, under a Chapter 7 bankruptcy, the debtor’s nonexempt assets are liquidated for the benefit of the debtor’s creditors.  When the bankruptcy proceeding is initiated…for example a Dallas bankruptcy lawyer assisted case, the bankruptcy court will appoint an impartial trustee to administer the liquidation of the debtor’s assets.  Not all of the debtor’s assets will be liquidated because some assets are exempt from liquidation.  Exemptions are found in 11 U.S.C. 522 and include real property up to a value of $20,200, life insurance policies, all child support and alimony payments, and personal property.  Personal property includes a motor vehicle up to a value of $3,225, household goods, appliances, clothing, etc. up to $525 per item or a total of $10,775, and tools for your trade up to a value of $2,025.  Federal law allows states to opt out of most federal exemptions, but states cannot opt out of some exemptions, including the exemptions listed above.

A majority of Chapter 7 bankruptcy cases are “no asset” cases, meaning all of the debtor’s assets are exempt and cannot be distributed to creditors.  When a debtor has assets that are subject to liquidation, the case trustee is responsible for liquidating the debtor’s assets in such a way to maximize the return to unsecured creditors.

Relief in a Chapter 7 case comes in the form of a discharge of the debtor’s debt.  After a discharge, a debtor is no longer personally liable for most of his or her debts.  Furthermore, a discharge prohibits creditors from taking any further action toward collecting on the debts owed.  Debtors’ debts are discharged in most cases.  One important caveat to note is that bankruptcy laws differ from state to state. For example, when filing bankruptcy in Texas, it’s important to hire a local, competent bankruptcy law firm who can navigate the ins and outs of localized bankruptcy code. See here for more information on filing bankruptcy in Texas. As long as the debtor has not engaged in any bad faith actions or misconduct such as fraudulently concealing, transferring, or destroying property.  Discharge primarily applies to unsecured debt, and creditors of secured debts may still be able to seize the property that secured the debt.  A debtor has the option of reaffirming a secured debt, which will allow the debtor to keep the secured property.  A reaffirmation creates an agreement between the debtor and creditor stating that the debtor will continue to remain liable for the debt.  This agreement may change the structure of the debt agreement and may relieve the debtor of a part of the debt.  On the other side of the reaffirmation, the creditor allows the debtor to remain in possession of the secured property on the condition that the debtor stays current on payment of the debt.

Chapter 9 applies to bankruptcy of municipalities, such as cities, towns, and counties.  Chapter 9 provides an alternative to liquidation and allows a municipality to adjust or reorganize its debts.  Because this chapter applies only to municipalities, there is no option for liquidation.  Essentially, a Chapter 9 bankruptcy ensures court oversight of the reorganization of debts between a municipality and its creditors.

Chapter 11 generally applies to businesses, including corporations and partnerships, who wish to reorganize their debts in order to save the business.  Although Chapter 11 is generally a bankruptcy remedy sought by businesses, individuals can seek relief under Chapter 11 as well.  Appointment of a case trustee can happen in a Chapter 11 case, but it is not common.  When an individual files for bankruptcy under Chapter 11 and a trustee is not appointed to the case, the individual is called a “debtor in possession.”  A debtor in possession is a debtor who is allowed to keep his or her assets during the bankruptcy proceedings.  The purpose of a Chapter 11 bankruptcy is to reorganize debt.  Whether an individual or business files a Chapter 11 bankruptcy, the individual or business can convert his or her claim to a Chapter 7 bankruptcy if, throughout the proceedings, the individual or business decides that a Chapter 7 bankruptcy is the better option.

Chapter 13 applies to individuals with regular income.  This Chapter allows a debtor to adjust his or her debts, allowing him or her to pay his or her debts over time, usually a period of three to five years.

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