Do I Need to File Bankruptcy?

Whether an individual should file a bankruptcy is a very personal question. On the other hand, whether a business should file a bankruptcy is, or should be, a business decision. The difficulty of this decision in both instances is eased by the fact that preparation for bankruptcy often makes good financial sense whether one ultimately files or not. It is always wise to keep in mind that the worst may happen - and be ready for it.

Why should an individual file bankruptcy? Because it ends debt that cannot be paid, or because it provides an opportunity to pay debt that cannot be ended.

Why should a business file a bankruptcy? Because it provides an opportunity to reorganize and ease or erase some debt, or it can be an excellent way to liquidate a business in a manner that is calculated to protect the principals of that business and treat the creditors fairly.

What is a Chapter 11? Chapter 11 is a bankruptcy that is used for corporations and individuals with unique problems. Chapter 11 can force the return of seized assets, stop foreclosures, keep a business open, force a payout of tax debt, force a payout of mortgage debt or floor plans or equipment debt or lines of credit and others. It can be a shield for individuals who guaranteed notes and provide an umbrella of protection to guard the business from creditors, from lawsuits and the tax man until a reorganization plan can be approved by the bankruptcy judge. A reorganization plan is a court order that requires all parties (both debtor and all creditworthy live by its terms.

What is a Chapter 7? A Chapter 7 bankruptcy for a person (rather than a corporation) is a trade. It is an exchange. The person who files (the debtor) trades all of his non-exempt assets for a discharge of debt. Non-exempt assets are anything of value that the debtor would lose if someone sued the debtor for an unsecured debt and then took everything that the law allowed him to take. In Texas, most property owed by most people is exempt. That is, it cannot be lost to either a bankruptcy or someone collection on a judgment for an unsecured debt. Generally speaking, a homestead and its contents are exempt (not lost), one car for each person in the family is exempt (not lost), and insurance policies are exempt (not lost); retirement, pension plans and IRA's are exempt (not lost) and sometimes some cash is also exempt (not lost). If all of the debtor's assets are exempt, then the debtor loses nothing in the bankruptcy. That is, he trades nothing for a discharge of debt.

What is a Chapter 13? A Chapter 13 bankruptcy is the same as a Chapter 7 bankruptcy, except the trade takes place over time and the debtor can make monthly payments instead of losing assets. Chapter 13 also provides terms to pay taxes - and IRS has to take whatever the Bankruptcy Code gives them. Chapter 13 gives terms to pay back missed mortgage payments - so the debtor can save his house from foreclosure and make up the missed payments over time. The debtor can also use Chapter 13 to pay back a portion of what he owes to all of his other creditors. In a Chapter 13, the debtor pays what he can for 36 to 60 months (his choice) and when he is finished paying all that he can pay, all that he could not pay is discharged.

Charles Chesnutt