Bankruptcy Information Page
Bankruptcy: An Overview
Even the hardest workers and the most diligent bill-payers can find themselves with more debts than they can pay as they become due. In such cases, filing bankruptcy may provide a solution to what seems like an insurmountable problem. If you or someone you know is facing serious financial challenges, it is very important to seek the counsel of an experienced bankruptcy attorney. Once considered a last resort, bankruptcy has evolved into an accepted method of resolving serious financial problems. The bankruptcy lawyer's goals are to help debtors make a fresh start and ensure that creditors get paid. A skillful attorney can guide you through the complicated legal maze of bankruptcy.
Bankruptcy law is primarily federal in origin and therefore varies little from state to state. The United States Constitution grants to Congress the power to establish uniform bankruptcy laws throughout the United States, which ensures consistency and predictability in how bankruptcy proceedings are conducted. The individual states do, however, retain jurisdiction over certain debtor-creditor issues that are not addressed by and do not conflict with federal bankruptcy law, such as which property remains exempt from creditors' claims.
Commercial and Consumer Bankruptcy
Both businesses and individuals may file for bankruptcy. Commercial bankruptcy is a remedy available to businesses that are unable to pay their debts. Options include liquidation, in which many of the business's assets are sold and the proceeds are divided among the creditors, and reorganization or restructuring, in which the business continues to operate according to a plan that allows for at least partial payment to creditors. Consumer bankruptcy, by contrast, is a method by which individuals may be able to get out from under insurmountable debt and make a fresh start, albeit with a negative impact on their credit rating. As in commercial bankruptcy, there are two options: liquidating assets to pay off creditors or filing a wage-earner plan that allows the debtor to retain more assets while working to pay off his or her debts. An experienced bankruptcy attorney can help you choose the right course of action for your particular situation.
Chapter 7 Liquidation
Bankruptcy law provides two basic forms of relief: (1) liquidation, and (2) rehabilitation, also known as reorganization. Most bankruptcies filed in the United States involve liquidation, which is governed by Chapter 7 of the Bankruptcy Code. To qualify for Chapter 7, an individual debtor has to satisfy a financial means test. In a Chapter 7 liquidation case, a bankruptcy "trustee" collects the debtor's "non-exempt" property (as opposed to the property that the debtor is allowed to keep and that is not subject to the creditors' claims) and converts it into cash. The trustee then distributes the resulting funds among the various creditors according to an order of priority described in the Bankruptcy Code. Not all creditors receive the full amount owed through this process; in fact, some may receive no payment at all. When liquidation and distribution are complete, the bankruptcy court may discharge any remaining debts of an individual (non-business) debtor. If the debtor is a corporation, it ceases to exist after liquidation and distribution, and there is therefore no reason for further discharge because the creditors cannot seek payment from an entity that no longer exists.
Chapter 11 or 13 Reorganization
In a rehabilitation or reorganization, the option often preferred by the courts, creditors may be provided with a better opportunity to recoup what they are owed. This type of bankruptcy is governed by Chapter 11 or Chapter 13 of the Bankruptcy Code. Chapter 11 generally applies to individual debtors with excessive or complex debts, or to large commercial entities like corporations. Chapter 13, by contrast, generally applies to individual consumers with smaller debts. Farmers and municipalities may seek reorganization through the Code's special chapters, Chapters 12 and 9, respectively. Reorganization provides debtors with a greater opportunity to retain their assets if they agree to pay off their debts according to a plan approved by the bankruptcy court. If the debtor fails to adhere to the plan, however, the court may still order liquidation.
Whatever the Chapter, the petitioning debtor must first undergo an individual or group briefing regarding credit counseling and budget analysis skills.
"Voluntary" and "Involuntary" Bankruptcies
Most bankruptcy cases are filed by the debtor and are thus considered "voluntary bankruptcies" (although few would "volunteer" to be in this position). Once a bankruptcy petition is filed, the debtor is immediately entitled to relief from creditors through the bankruptcy procedure known as the "automatic stay." The automatic stay freezes all debt-collection activity and forces creditors to allow the bankruptcy court to determine how payment will be made.
Not all bankruptcy proceedings are voluntary, however. Under Chapters 7 and 11, creditors, too, have the option of filing for relief against the debtor, in which case the proceeding is called an "involuntary bankruptcy." Involuntary bankruptcies are allowed only when certain minimum thresholds are met; for instance, there must be a minimum number of creditors and a minimum amount of debt. The debtor has the right to file a response to an involuntary petition, after which the court will determine whether the creditors are actually entitled to relief. If the court dismisses an involuntary bankruptcy filing because it has no merit, the creditors may be ordered to pay the debtor's attorneys' fees, damages for any losses the debtor experienced because of the bankruptcy, and even punitive damages to punish the creditors for the frivolous or abusive filing of a petition. An experienced bankruptcy attorney can provide essential advice whether you are a debtor considering voluntary bankruptcy or facing an involuntary bankruptcy proceeding, or a creditor seeking relief through an involuntary bankruptcy.
Lawyers specializing in bankruptcy law can help both debtors and creditors overcome obstacles to the repayment of debt. Their expertise often extends beyond bankruptcy to include debt repayment and collection options that can circumvent the need for a bankruptcy filing. Experienced bankruptcy attorneys have the knowledge and expertise to help their clients get out from under formidable debt and emerge as productive citizens, and can also assist their creditor clients in collecting what is rightfully theirs.
Frequently Asked Questions about Bankruptcy
Q: Are there alternatives to filing bankruptcy?
A: If the debtor's financial problems are only temporary, he or she can simply ask creditors to accept lower payments or grant an extended payment schedule. Creditors may be receptive to these ideas if the debtor has been a prompt payer in the past or if they wish to avoid the inconvenience of a bankruptcy proceeding. Consumer credit counselors can also help creditors work out a repayment plan. Some of these advisors work for non-profit agencies, so they charge no fees, but others charge a fee or may even be unscrupulous and should therefore be avoided.
Q: Does a Chapter 13 bankruptcy discharge eliminate all debts?
A: A Chapter 13 bankruptcy discharges only those debts provided for by the plan. Any outstanding debt that is not in the plan will not be discharged. In addition, a Chapter 13 discharge does not affect outstanding debts or domestic support obligations; educational loans; drunk driving liabilities; civil restitution or damages for willful or malicious acts causing personal injury and debt; criminal fines and restitution obligations; and certain other long-term obligations that extend beyond the term of the plan, such as home mortgages; withholding taxes; un-filed or late-filed tax returns; fraudulent or willful evasion of taxes; or debts incurred by fraud.
The law offices of Cheryl S. Davis, P.C. can also refer our clients to a financial advisor who will advise them not only on their impending bankruptcy proceeding, but on how to handle their finances in the future so they will not find themselves in a similar situation again. Our hands-on approach with our clients will give you the information and confidence you need to avoid credit problems in the future.
Contact us today to schedule a free initial consultation or to learn more about our bankruptcy attorneys.
The Law Offices of Cheryl S. Davis, P.C.
11601 Pellicano Suite B-18
El Paso, TX 79936
Phone (915) 565-9000
Fax (915) 565-9191