Bankruptcy Changes – Chapter 7, Reorganization and Liquidation – Alternatives

The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPC), brought about a few changes to the current USA bankruptcy laws, but in essence the structure of the 1978 Act remains the same.

Bankruptcy is a legal procedure that protects an individual or business that cannot pay its debts; it also protects the creditors. These legal proceedings may be:

• Voluntary, which is initiated by an individual or business unable to pay its debts.
• Involuntary: where the creditors take action, provided they prove the individual or business has debts in excess of $5,000.

Resolution

Once the petition is filed, the court will decide under one of the three following means:

Chapter 7 calls forliquidation; that is the sale of the assets of the debtor and the proceedings of the sale used to pay the claims of the creditors. Excluded from this chapter are railroads, banks, insurance companies, or government units. The act specifies that secured creditors have priority over unsecured creditors.

Chapter 11 calls for reorganization; that is the individual or business is given 120 days to present a reorganization plan that eliminates the factors that cause the distress. Such plan must be confirmed by the court. In many instances the plan works and the bankrupt individual or business comes out stronger and ready to function on its own once again. Federated Department Stores, Macy’s, Texaco, and some airlines are examples of reorganization. (more…)