Quick Tips: Bankruptcy

May 05, 2009

With so much talk in the news lately about tough financial times, people are asking lots of questions about what bankruptcy really means. Taking the mystery out of the legalese shouldn’t be too hard, and most attorneys can quickly explain the details and obligations that go along with the process.

  1. Bankruptcy is really a blanket term covering a lot of different legal proceedings, isn’t it?

There are a lot of different kinds of Bankruptcy filings that a company (or person) can ask the court for the way the law is set up. Commonly, when we hear about a Bankruptcy, we immediately hear "Chapter 7," “Chapter 11” or “Chapter 13.” Those chapters refer to sections of the federal laws that govern different situations or different outcomes the creditor wants from the court.

  1. What does a Chapter 7 Bankruptcy typically cover?

Chapter 7 is widely used by individuals, although businesses choose or are forced to use that set of protections as well. Under Chapter 7, the debtor submits a list of assets, debts, creditors and other financial materials along with a budget of basic living expenses to the court for review. Chapter 7 is typically called a “Liquidation Bankruptcy,” because the aim here is to liquidate as many of the assets as possible, freeze the debt, and ultimately pay off as many creditors from existing assets as the debtor can. The benefit of this form of bankruptcy is that, in most circumstances, no further action can be taken by the creditors once the motion is filed in court, and after the bankruptcy is discharged, the debtor is free from those original debts, except for the fact that a bankruptcy remains on the credit record. (Some critics point out that Chapter 7 is widely misused or abused by some entities that actually use the filing as a means to conduct insincere “going out of business” sales. Since the responsibility of the court in a Chapter 7 liquidation is largely to see that the majority of cash goes to the creditors, in those cases a company may set up a company for the sole purpose of closing it, using the loose terms of the court ordered liquidation to import an unending stream of merchandise to support a fictional or exaggerated debt. Since this liquidation sale is part of a federally mandated bankruptcy case, local law enforcement agencies and Attorneys General cannot interfere with the sale, merchandise offered, the length of the sale, or any other aspect of the sale event.)

  1. Chapter 11 Bankruptcy we’re hearing a lot in connection with businesses. What does that Chapter cover?

Chapter 11 is possibly the “friendliest” of the common Bankruptcy cases, in that the plan is to keep the business open and operating. Usually referred to as a “Reorganization,” the debtor is asking the court for protection from its creditors – creditors that would otherwise seize property or foreclose on loans are blocked from doing so – while the business is reformed in a manner that should make it more profitable in the future. A Chapter 11 Bankruptcy is a gamble (there’s no guarantee that the new plan will work or that the business will be able to overcome the deficit that placed it in dire financial straits), but does offer breathing room while the company attempts to get its house in order and running in a profitable manner again. There are serious risks and downsides to the plan. If the firm is publicly traded, it must be removed from stock market listings through the period of reorganization. If the initial plan fails (and depending on the exact arrangements made by the court), its creditors may propose alternative recovery plans. Also, during the reorganization, the company may choose to liquidate, close or otherwise disburse its assets or holdings. In the case of larger companies with multiple outlets, this may mean closing or discontinuing service through branch offices or less profitable lines.

  1. Chapter 13 Bankruptcy is another form in the news often these days. How does that compare to the others?

Chapter 13 applies many to consumer bankruptcy filings. It allows for repayment to the creditors without the burden of collection agents or other perceived harassment, and has the advantage of not being reportable for as long a period of time on credit reports under most circumstances, but it calls for a stringent court-approved plan to funnel as much disposable income to the existing creditors as possible. It takes a severe problem and a strong commitment to win a Chapter 13 Bankruptcy ruling from most federal courts; a backlash in the early 2000’s caused a great deal of criticism of the Bankruptcy Courts and the reaction has been to make it more difficult for consumers to obtain this protection.

  1. The Better Business Bureau does not typically give legal advice, but this article contains a lot of what sounds like legal answers. What makes this subject different?

This article is not meant to offer legal advice to anyone who is considering protection under Bankruptcy Law, but rather serves as a “treetop view” of a topic that is in the news almost daily. It’s meant to give quick answers, but not necessarily complete information. If you’re curious, you can find reliable, more detailed information on the topic by searching the Internet, looking through Google or Wikipedia entries. If you are considering filing for Bankruptcy in any form, there’s no substitute for speaking to a practicing attorney. The number for the Oklahoma Bar Association is 405.416.7000; that agency can answer many of your questions and may be able to help you find a lawyer who will help you with the proceedings and necessary filings. It’s important to understand, however, that the BBB is routinely approached for information about topics that are important to consumers and business owners. The answers to those questions may involve the law. The Better Business Bureau in this case has researched the most common answers to the questions to give an immediate answer, but this should not represent a legal opinion of the matter or legal advice under any circumstance. Protecting yourself and acting in your own best interest in this matter may require speaking to, and perhaps hiring, a knowledgeable attorney.