March 30th Bankruptcy 04 01 2015 March 30th Bankruptcy Federal law because g vt decided to keep the expertise in one central place Two types of bankruptcy procedures Temporarily in financial difficulty but not hopelessly in debt Liquidation when you are in way over your head in debt and your assets are liquidated to pay off your debts Until 2005 individuals could file as often as they want to but in 2005 the bankruptcy law was revised substantially to make it more difficult for people to file for bankruptcy This was because there were a lot of people who weren t getting compensated due to a lot of people filing for bankruptcy Two changes made Before an individual could file they had to take credit counseling which is where you sit with a financial person and discuss your level of debt and other options besides bankruptcy If they do decide that they need to file they re required to take a second course called debtor education how to prepare a budget how to avoid spending more than you earn etc If you decide you re totally in debt and need some of your debts discharged you can only do that once every 8 years Trustee in bankruptcy the person who works with the individual in debt that decides which type of bankruptcy to pursue and gets a true picture of this person s full finances Objective is to maximize the amount of assets that can be liquidated to pay off creditors Two types of bankruptcy explained Liquidation Chapter 7 Filing in the Bankruptcy Act most severe level Applies to individuals and businesses Asks to liquidate their assets and pay off as many debts as they can with that and they ask for their remaining debts to be discharged Trustee in bankruptcy works basically for creditors instead of for the debtor to find as many assets as possible to use to pay off the creditors in the proper order Individuals can only do this once every 8 years Can be voluntary or involuntary forced bankruptcy takes 3 of the creditors to go in together and go to the courts and say this person needs to file for bankruptcy Chapter 13 Filing Only available to individuals not businesses Reorganization of debts No legal discharge Basically asks for more time to pay off debts court can legally go up to 5 years and usually give 3 They ll look at your personal finances and decide based on what you re capable of Court protected debt payment plan as soon as you file you come under the jurisdiction and protection of the court all of your debts are frozen and those creditors you owe cannot take legal action against you during this If you are granted bankruptcy creditors have to deal with this What if you re 2 years into your 3 year plan and realize that it s not working You can go to the bankruptcy courts and ask to switch to liquidation chapter 7 Chapter 11 Filing Available only to businesses called business reorganization No debts are discharged The business continues to operate it is not liquidated We re not hopelessly in debt we ve just hit a rough spot and we can work our way out of this if we have more time Gives the company more time to repay debts without having to stop operating and eventually become profitable again If the company files they present a plan to the court for how long they think it ll take to get back on their feet There is no set time for the court to grant usually is about 3 years Depends on the business its size and the economy and such When the business files it becomes under the protection of the bankruptcy court and their debts are frozen Creditors cannot bring a lawsuit against them or seize their assets Can be a little messy and expensive because if the business is under the protection of a court the executives can t make any decisions without the approval of the court and the trustee in bankruptcy A creditors committee is appointed by the bankruptcy court typically made up of 3 or 4 of the business creditors They work with the trustee and have to approve major decisions as well Slows down the business adds cost trustee gets paid If the business realizes their current bankruptcy plan isn t working they can switch to a chapter 7 filing by going to court Trustee then liquidates the business goes out of business and funds are distributed to creditors in order of priority Business is no longer in existance It is illegal to move your assets around 90 days prior to filing for bankruptcy to hide them from creditors courts will legally take these back Order of Creditors First priority of creditors secured creditors has a security interest in an asset filed a form that said if the debtor doesn t pay the creditors have the right to take that asset If they don t get paid they have first priority to get paid but they might not be paid in full They have to work with the bankruptcy court and be satisfied with the result before any other creditors get paid Second priority If you die and your estate is bankrupt these creditors have second priority Third priority Unpaid wage claims if you file for bankruptcy but you have employees these people get third priority Fourth priority unpaid claims of farmers and fisherman Kind of a more historical thing that s kept in the law Federal law sees these people as hardworking individuals that deserve to be paid for their efforts if unpaid Fifth priority refund of security deposits If an apartment complex took security deposits and then never gave them back Sixth priority alimony and child support Seventh priority unpaid taxes Last priority general unsecured creditors ex someone who sold you a car on nothing but your promise to pay and then was never paid All the creditors above you have to be reasonably satisfied before you can get anything from the debtor Chapter 7 bankruptcy the trustee takes all the assets that are non exempt and then distributes the cash in order in agreement with the creditors If after that there are still unpaid debts they are discharged Creditors must deal with this but it can only happen every 8 years Debtors who file for bankruptcy have an obligation to fully and honestly disclose your assets and liabilities to trustee in bankruptcy and then they have to testify to the court that you re telling the truth If he feels like you aren t he ll recommend that the court not discharge them In a bankruptcy filing the court has the authority to force creditors to accept settlements and can order it Some debts are never discharged Alimony and child support Taxes Student loans the only ones that will be discharged are ones that you can show