Some Basics

The concepts of bankruptcy are not overly complicated, however, the procedures, forms, analysis, risks and overall navigation of obtaining relief from creditors is difficult to make simple. Each person and case present their own unique issues and consultation with your professional is by far the most practical approach.

For a general grounding in basic bankruptcy click here

Consumer vs. Business Bankruptcy for Individuals. A personal bankruptcy involves a flesh and blood person, not corporations or limited liability companies. Personal bankruptcy will fall into one of two sub-categories. A “consumer” case is where the person (or married couple) has the majority of their debt as non-business, (typically mortgages, car loans, medical debt and/or credit cards). A personal “business” bankruptcy is a distinction where the flesh and blood individual has more than 50% of the debt related to business. The relation may be personal guarantees of business loans or leases for example. It may also be personal credit card debt where the cards were used to float a failing business venture.

The Discharge Order. The goal in most such personal bankruptcies the Discharge Order. This order releases the individual from the liabilities that arose before the case was filed and allows him or her a “Fresh Start”. The discharge order forbids any creditor from making any attempt to collect the debt. No phone calls, no lawsuits, garnishment, no transfer to a debt buyer, no listing a balance due on your credit reports, etc. Failure by a creditor or debt collector to abide by the order can result in serious sanctions against them.

A True Business Bankruptcy. By contrast a bankruptcy for a business, such as a corporation or limited liability company (LLC) has the purpose of reorganizing the company if possible (Chapter 11) or liquidating its assets in an orderly way to allow some fair distribution to its creditors (Chapter 7).

A key distinction between personal cases and true business cases, particularly in Chapter 7 liquidation, is that the personal debtor gets to keep a substantial amount of property to facilitate his/her fresh start and he/she gets the Discharge Order as a permanent protection against creditors. What property an individual may keep from being liquidated varies from state to state and case to case. (See Exemptions for more information.) In many cases the debtor(s) keep all their property.

On the other hand, a company going out of business has no need to retain any property. There simply will not be anyone around, so anything the company owns gets turned to cash and creditors may get something. Further, a liquidated company does not need a Discharge Order since there is no one to harass or sue.

The Automatic Stay. In order to make any bankruptcy work the Court must take immediate control over the financial situation. To do this the law provides that the moment a case is filed in any chapter a blanket restraining order called the Automatic Stay is placed in effect. Unlike a typical restraining order the Automatic Stay is effective without notice, i.e. immediately. The Automatic Stay forbids any creditor from taking any action to collect a debt. This includes having a foreclosure sale, or shutting a business for taxes, or continuing a lawsuit or making direct contact with the debtor. It is an extraordinary and powerful order that gives immediate relief to the petitioning debtor and sets the bankruptcy machinery in motion.

So, the fundamental basics about bankruptcy is that filing a case invokes the powers of the bankruptcy court to take control over assets and liabilities of the debtor, and stop collection actions –whether personal or business. Through the formal procedures the debtor can restructure the legal playing ground to give relief to the debtor. This happens in different ways depending on the Chapter of bankruptcy chosen and the facts of each case. Your professional is there to guide you through the process and obtain the best possible results.