AN OVERVIEW OF BANKRUPTCY 1

An Overview of Bankruptcy

BUS 260a – Business Law

West Cliff University

Presidential Business School

Submitted to:

Madhab Prasad Regmi

22/11/2020
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Abstract

This paper is a part of major assignment(CLA) which discusses about the concept of Bankruptcy.

There are three types of bankruptcy and its procedures to file which is explained thoroughly.

Further, the paper explains consequences of bankruptcy along with the circumstances that

induces company to file bankruptcy. Paper also explains the asset and liabilities of debtors during

the process of bankruptcy, non-dischargeable debts during the process and recommendation to

the creditors regarding possible steps they can take to recover their money. Similarly, the

concept of bankruptcy is being related with two industry example of General Motors and Six

Flags.

Overview of Bankruptcy

Bankruptcy can be defined as the formal process that allows businesses, individuals, and

even governments to overcome their financial distress (Verderber & Allison, 2004). It is meant to

support the parties by either reducing the debts or make arrangements under the supervision of

the bankruptcy-court to recover the debts, depending on the case.

The regulation of bankruptcy is induced from various factors such as

• The inability of lenders creating recovering procedure from debtors (due to the

incomplete contracts)

• A reallocation of funds for effective use

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• The need for immediate protection from company's executives by creditors in order to

address their liquidity.

Bankruptcy is usually a strategy that is created to relief a people from financial insolvency.

Types of bankruptcy

Bankruptcy can be implemented in various field form business, farmers to government

bodies and municipalities. Company bankruptcies come into four sections i.e. chapter 7, chapter

11, and in some cases chapter 12 and chapter 13 (Berkovitch, Israel, & Zender, 1994). The type

of bankruptcy depends on circumstances and each type has its own purpose and procedure.

Chapter 7

Chapter 7 is the most common type of bankruptcy also known as liquidation bankruptcy.

This type of bankruptcy is filed when the people have no further source of income to repay their

debt and therefore have to sell the asset. This type of bankruptcy is filed by the people with lower

income or people who do not have disposable income (Van Auken, Kaufmann, &

Herrmann, 2009).
In chapter 7 bankruptcy, unsecured debts are divided into various categories, with priority

being given to each category for payment. In other hand secure debt debts which is backed by the

collateral which reduces the risk of lender. In chapter 7, unsecured debt will be paid first. Some

of the unsecured debts are tax, child support injury claims and so on. Whereas, secured debts are

generally settled later and finally, at last, payment of unsecured non priority debts are paid.

Procedures for Chapter 7 bankruptcy

There are few steps involved in this kind of bankruptcy process.

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a) Counseling

The one who files for chapter 7 bankruptcy must first get the counselling for the

period of 6 months. However, this will not be applicable in a situation where is no

authorized counselling from application.

b) Forms

Filers must fill up several forms before entering into the process including petition

to the court to start the process. The filers must be providing the information such as

debtor’s finances, creditors, assets, income, and expenses.

c) Trustee Appointment and Meeting of Creditors

After filling up the form, there will be appointment of trustee who are supposed to

be unbiased and analyze the situation of bankruptcy. In order to compensate creditors,

trustee review assets and decide which assets should be liquidated. After reviewing, trustee

consults with their creditors, where it checks the legitimacy of the petition and accounts.

Here, the creditors discuses with trustee and debtors in the meeting.

d) Repayments of debts
Trustee further investigates the debtor's financial properties and accounts. The

debtor maintains excluded land-or property required to sustain basic living conditions.

Non-exempt properties are confiscated and liquidated in order to compensate creditors.

In certain cases, though, debtors are entitled to retain their primary residence, personal

belongings, and vehicle. The trustee then manages the disposition of all other properties

(Korol, 2017).
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Chapter 13 Bankruptcy

A chapter 13 bankruptcy is process specifically designed for income earners. This type of

bankruptcy support people having continuous source of income to develop a plan for the

repayments of their debts. This type of bankruptcy, the borrower offers creditors a plan to repay

their debt on installment ranging from 3 to 5 years.

File of chapter 13 bankruptcy can avoid foreclosure proceedings and may cure delinquent

mortgage payments over time. However, filer should make a mortgage payments according to

the plan and process of chapter 13 bankruptcy.

Procedures

a) File a petition

Filers must fill up several forms before entering into the process including petition

to the court to start the process. The filers must be providing the information such as

debtor’s finances, creditors, assets, income, and expenses.

b) Appointment of Trustee

After filling up the form, there will be appointment of trustee who are supposed to be

unbiased and analyze the situation of bankruptcy. In order to compensate creditors, trustee

review assets and income of the debtors

c) Creditors file objection (Only in special case)

d) Submission of tax returns

e) Repayments of debts according to the plan. Generally, debts are paid on installment basis

which range from 3 to 5 years.

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Chapter 11 Bankruptcy

Chapter 11 Bankruptcy is also known as a reorganization bankruptcy. As the name

suggest, this process involves reorganizing the debtor’s business, debts. This kind of bankruptcy

gives debtors a new beginning where the debtors are obliged to follow and work under

supervision of the court.

Reorganization bankruptcy is usually very complex and expensive at the same time due to

which debtors must take all the consequences into consideration while filing for Chapter 11

Bankruptcy. Generally, a borrower under Chapter 11 offers a reorganization plans to allow his

business afloat and to repay creditors the debts to the creditor (Mackevičius & Silvanavičiūtė,

2011).

Procedure

 File a petition

The fling process can be both voluntary and involuntary where voluntary is when debtor

files for the process whereas in involuntary case, creditor files for the process. Both the forms

have to follow legal procedure while filing for bankruptcy.

 Appointment of Trustee

Trustee is responsible for monitoring the debtor in possession's operation of the business

and the submission of operating reports and fees.

 Appointment of creditor committee

Trustee appoints creditors committee who are involved in consulting on the management

of the case with the debtor in possession; reviews the actions and activity of the company of the

debtor; and assists in the formulation of a strategy.

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Chapter 9 Bankruptcy

Chapter 9 Bankruptcy are basically for the development of municipality saving it from

the creditors. This type of bankruptcy work for financially troubled municipalities This form of

bankruptcy can reorganize the financial liabilities of cities, states, school systems, state councils

and health centers (such as villages and towns).

Chapter 12 Bankruptcy

Chapter 12 bankruptcy is a newly introduced law which is designed to help the families

of farmers and fish men to streamline their finances and avoid liquidation or foreclosure. If the

debtors file for the bankruptcy they also have to come up with the repayment plan within 90 days

of application submission.

Debtor’s assets and liabilities during bankruptcy

Debtors are required to inform court about its asset and liabilities in a detailed form. In

order to process petition for the bankruptcy, debtors should give information about their bank

balance, house and properties, household furnishings, debts owed, payments and transfers made,

sources and amount of income received.

Trustee analyzes uses the asset of the debtors. Some asset is protected like necessary

household item, trading tools, primary means of vehicle. Similarly, there unprotected asset tat

trustee can sell to repay the debts are trading tools of value above 3700USD and vehicle above

7800 USD, bank balances, shares and other expensive items.

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When the bankruptcy process comes to an end, their debts are discharged where debtors

are not obliged to pay them. Similarly, a kind of debt like student loans, child support, criminal

fine aren’t discharged.

In the end of bankruptcy process, a debtor can free themselves from outstanding debts

whereas, creditors cannot assert the outstanding balance of those claims on behalf of bankruptcy,

unless the claim was fulfilled by bankruptcy and are not allowed to continue to seek such a

liability (Dawley, 2003).

Debts that are not dischargeable in bankruptcy

Dischargeable debts are the kind of debts which debtors are not obliged to pay to the

creditors after the process of bankruptcy.

US bankruptcy code has categorized 19 types of debt that cannot be discharged (White, 1998).

• Debts that you leave out of your bankruptcy case unless your filing was already

known to lenders.

• Numerous forms of taxes

• Help for offspring or alimony

• Fines due to enforcement authorities or penalties

• Loans to students

• Personal injuries debts resulting from a collision involving drunk driving;

• Debts stemming from tax-advantaged pension plans;

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Recommendation to the creditors

Creditors always have certain level from the bankruptcy filed by debtors as the

bankruptcy are filed to discharge portion of the debts.

There are few steps creditors need to follow while the process of bankruptcy
a) Participate creditors' meeting

It is important to attend the creditor's meeting as it provides them an opportunity to

interact with debtors and ask right question and accept the debtor's disposition. Creditors

can get incredibly useful details that can get you through the whole process of bankruptcy.

Creditors will also be able to know the reason behind entering into the process of

bankruptcy and access the real financials of debtors so that no false information are being

disseminated to the court

b) Filing notice of appearance

This will allow creditors to be informed by the court on the matter of debtor’s all

actions throughout the bankruptcy process.

c) Automatic stay relief

Creditors can apply for automatic relief if they have some interest on the properties

owned by the debtors. This will allow debtors to either start or continue the process of

foreclosure which will help to recover the asset that is being leased by the debtors. d) Dismissal

Creditors can have a chance to dismiss the whole case. Bad faith or qualification

questions provide situations wherein the court can dismiss the process of bankruptcy e) Review

reports:
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Since the report plays an important role in the bankruptcy, creditors holds that

right to review the financial reports and information that a debtor submits to the trustee

during the process of bankruptcy.

Consequences of filing bankruptcy

Bankruptcy has its own positive and negative consequences that the debtors filing any

type of bankruptcy should be aware of. Some of the consequences are explained as below a)

Personal discharge

One of the positive consequence is the discharge of the debt that is done by the

court which will protect debtors from making the payment to creditor. This is more

applicable in the loans like credit card where the lenders, in this case bank will not have a

major loss with a default one credit card and debtors will not get sunk into the debt. b)

Automatic Stay

This process can be helpful to the debtors as they are automatically protected from

further pressure from creditors to pay their debt as soon as debtors files for the process of

bankruptcy.

c) Credit score

The filing of bankruptcy will decrease the credit score of the debtors which can

difficult more them to find source of fund in future from any creditors due to the trust

issue.
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d) Privacy

There won’t be any privacy once debtor’s files for bankruptcy. Public can get all

the bankruptcy schedules containing financial report and other confidential information.

Which means friends, relatives, colleagues, and consumers might find out the specifics

of who the debtors owed the debts.

e) Loss of property

There is a possibility for debtor to lose all the property during the process of

repayment that is being handled by the trustee. The court generally analyzes your current

income, property and ability to repay the loan. During the course, if debtors are found

owing valuable building or other asset trustee will make sell to repay the debts to the

creditors.

Industry example

General Motors

During the time economic downturn, a well-known company like general motors applied

for the process of bankruptcy with the total asset worth 82 billion USD and liabilities more than

twice worth 173 billion USD. This filing was beneficial to the company since the company

started working on the Newco plan through the court. Along with this, company was also funded

during the tenure of two president of USA, Bush and Obama. This was one of a historical

bankruptcy being filed in USA.

Six Flags

The company named Six Flags also filed for the reorganization bankruptcy. Owing 26

theme and waterparks the company was sunken into the debt of 2.7 billion USD in 2009. Later
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the company followed reorganization plan under the strict supervision of bankruptcy court which

was able to make a good comeback after the completion of bankruptcy process.

Conclusion

Bankruptcy is a legal process initiated by debtors when they are no longer in a situation to

repay the debts. Depending on the situation, income source and ability of debtors, bankruptcy

process is filed in the form of Chapter 7 ,13 12 or 9 There are few debts which is not

dischargeable and debtors are obliged to pay such debts. There are both positive consequences

like personal discharge and automatic stay from bankruptcies whereas some negative

consequences are loss of property, privacy and depression of credit score. In order to protect

themselves from bankruptcy, creditors can get involved in creditors meeting, review financial

reports, file notice of appearance or dismiss the process. The leading company like general

motors had also filed for bankruptcy which later successful in reviving business on track with the

execution of new process and government funding.

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References

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Management Bias in Bankruptcy Reorganizations. Journal of Financial and Quantitative

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https://www.vox.com/the-goods/2019/3/11/18259894/bankruptcy-business-chapter-

11close-stores

Van Auken, H., Kaufmann, J., & Herrmann, P. (2009). An Empirical Analysis of the

Relationship Between Capital Acquisition and Bankruptcy Laws. Journal of Small

Business Management, 7(1), 23-37.

Verderber, H., & Allison, K. (2004). TOWARD AN UNDERSTANDING OF THE

DIALECTICAL TENSIONS INHERENT IN CEO AND KEY EMPLOYEE

RETENTION PLANS DURING BANKRUPTCY. Northwestern University Law Review,

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Mackevičius, J., & Silvanavičiūtė, S. (2011). Evaluation of the suitability of bankruptcy

prediction models. Verslas: Teorija in Praktika; Vilnius, 193-202.

Investopedia. (2020). www.investopedia.com. Retrieved from

https://www.investopedia.com/ask/answers/102814/what-debt-cannot-be-

dischargedwhen-filing-bankruptcy.asp

Korol, T. (2017). Evaluation of the factors influencing business bankruptcy risk in Poland. e-

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White, M. J. (1998). Why it pays to file for bankruptcy: A critical look at the incentives under
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