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Bankruptcy Process

What does Lehman Brothers, Washington Mutual, or Enron have in common besides being multi-billion dollar organizations? All three have undergone extensive bankruptcy process and no longer exist today. To a layman, bankruptcy is defined as a legal process where debt ridden consumers or establishments manage and eliminate their debts.

Bankruptcy Process: The Procedure

When people in debt decide to file for bankruptcy, they normally seek out the services of a bankruptcy lawyer or a specialized firm. The lawyer decides under which bankruptcy code he should file the claim and what assets would be exempt from liquidation. The lawyer then reviews all financial statements from the creditors and makes an estimate of the amount of debt.

Once every document is in place, the firm submits the petition for bankruptcy either electronically or has a representative submit it in person in the court responsible for future proceedings. Depending on the amount of debt and the type of business, appropriate bankruptcy codes come into the picture and different processes, implemented.

Most individuals file for Chapter 7 liquidation or Chapter 13 for adjustment of assets. Most businesses file for Chapter 7 or Chapter 11 reorganization. In Chapter 7 bankruptcy, the debtor must surrender all assets to a trustee appointed by the bankruptcy court. The trustee will then sell the assets and liquidate them, and then pay off the creditors with the proceed from the sales. This is the most popular or common bankruptcy.

In Chapter 11, the businesses come with a plan for the repayment of debts and reorganization of the business. A plan to discharge the debts is also formulated. The businesses may or may not survive in the end and get acquired by a bigger organization.

In Chapter 13, the debtor negotiates a plan for payment of the debts, usually approved by a legal body. Once the plan is in place, the debtor pays off the debts to a court appointed trustee who distributes the assets to the creditors.

Bankruptcy Process: Pros and Cons

Pros:

·        Prevents foreclosures and repossessions

·        Option to retain some basic assets

·        Prevents class action from creditors

·        Start life fresh

Cons:

·        Almost impossible to get mortgages and loans

·        Lowers credit rating substantially

·        Extremely difficult to get credit cards

·        It’s an admission of defeat