It is the Chapter 11 bankruptcy law that allows businesses to seek the same protection and relief that individuals have a right to under the Federal bankruptcy statues. Any business entity, whether a large corporation, a small partnership or even a one-man sole proprietorship, can file under Chapter 11 in order to have their debts reorganized.
The Chapter 11 law requires that the business filing for brokeness, must provide full financial disclosure to the bankruptcy court. This means that the organization, or their attorney, must provide a complete and detailed list of all of the company's assets, all of the liabilities and a complete statement of the financial status and affairs of the entity.
Unlike other types of bankruptcies, according to Chapter 11 law, the debtor is able to act as his own trustee. In Chapter 7 and Chapter 13 bankruptcy cases, the court appoints a trustee.
When a debtor acts as a trustee in a Chapter 11 bankruptcy, it is known as a "debtor in possession" because the trustee maintains possession of the property. However, the court is able to appoint a different trustee to the case if there is just cause shown, such as in the case of mismanagement of the business entity.
After approximately one month from the time that filing for bankruptcy took place, the business and their bankruptcy attorney attend a meeting with the various creditors of the entity. According to Chapter 11 bankruptcy law, the company also is required to submit monthly activity reports that show the company's income and expenses. These reports are also summarized in the form of a balance sheet and a profit and loss statement for the period.
Chapter 11 law allows for the debtor to file a financial plan during the first four months after a new bankrupt filing is submitted to the Federal bankruptcy court. After that time, the creditors of the company are allowed to submit filings of their plans.
The Chapter 11 law also requires that the plan submitted by the debtor includes a disclosure statement that goes into detail of company's financial situation and future plans. Some of the areas that are disclosed are the following:
- a summary of the company history and the primary cause that necessitated filing for brokeness; - the company's assets and liabilities; - the income and the expenses of the operation; a - description of the company's treatment of their creditors; - an analysis of asset liquidation; projections of future earnings; - expected tax consequences; - a discussion of various options open to the entity; - and finally, the plan for repayment of the debts.
According to Chapter 11 bankruptcy law, the plan for reorganization can stipulate that the company must continue to operate the business in order to make the payments from future income, or from the proceeds of new loans or the sale of existing assets. Creditors who hold priority claims, including tax debts, are required to be paid in full.
Any secured claims also require full payment and must include interest as well. Other debts that are non-priority and are unsecured receive dividend payments which equal at least the amount that would have been granted under a Chapter 7 filing.
Bankruptcy is a very unfortunate situation and can happen even to seasoned businessman or to a new entrepreneur. To avoid falling into such a trap one should ensure to keep his or her financial health in a very good state. Filing bankruptcy is not an easy job and one has to go through a very complex process involving lot of complex court procedure. Also it affects badly your financial rating for securing loans, which you may need for business development or for your personal requirements at any future stage of your life.
Bankruptcy is a law provided for those who are unable to pay their debts and this law is utilized to provide them with a way of paying their creditors. Since there is no debtor's prison any more, no one has to worry about going to prison because of not being able to pay. Instead, bankruptcy consolidates the debts and sets up a schedule by which the debts can be paid.
One of the main purposes of Bankruptcy Law is to give a person, who is hopelessly burdened with debt, a fresh start by wiping out his or her debts. Actually life is not always fair. Most people that file for bankruptcy do so out of necessity not because they simply want to avoid paying their debts. Of all the people that file for personal bankruptcies, nearly 40% of them file due to some financial crisis outside of their control. In many cases this financial crisis is some serious health issue.
The debtor has to file the bankruptcy report in the court to stop further payment of interest on the borrowings on account of his inability to repay with declaration that his income is not going to improve in the near future as well. This requires furnishing causes of bankruptcy viz. losses in business, family dispute, job loss, poor health or illness, heavy expanses on treatment, natural calamity resulting in damage to assets or business etc.
Economic and social changes have prompted the need for reform on the bankruptcy laws through the years. The past couple of decades have seen changes in the financial world as well as social upheaval. With credit flooding the nation the past several decades, consumer debt has sky rocketed and the rate of default on credit cards has caused many to seek bankruptcy protection. Medical problems, divorce and job losses have caused most of the Chapter 7 bankruptcies.
A record number of bankruptcies were filed in the 1980s and early 1990s. Job losses and business losses accounted for this record number of bankruptcies. Many small businesses closed during this period, but also large companies such as Texaco, Continental Airlines, Greyhound and Pan Am also filed for bankruptcy. This large number of bankruptcy filings put the bankruptcy courts in a bind to handle all of them; thus, they utilized the assistance of bankruptcy professionals to speed up the court procedure. These professionals were approved by the court to act as examiners and mediators. The key to avoid bankruptcy is being fully aware of your financial standing at all times. Record your bill payments. You should know if you miss a payment. Try to forecast your ability to pay your bills into the future. If you constantly keep on top of your bills, your spending habits and your ability to earn in the future, you can easily avoid bankruptcy.
Both Mike Selvon & Steve Buchanan are contributors for EditorialToday. The above articles have been edited for relevancy and timeliness. All write-ups, reviews, tips and guides published by EditorialToday.com and its partners or affiliates are for informational purposes only. They should not be used for any legal or any other type of advice. We do not endorse any author, contributor, writer or article posted by our team.
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