Bankruptcy is an appropriate legal procedure through which entities or individuals who cannot pay debts owed to lenders can seek relief by liquidating some or all of their assets. In most jurisdictions, bankruptcy is legally imposed by a bankruptcy court order, typically initiated by the non-compliant debtor. In addition, certain types of bankruptcy are authorized by state law.
The U.S. bankruptcy code includes various types of bankruptcy. Under sections 766(b) and (c), debtors must first exhaust all applicable options before filing for bankruptcy. Once such alternatives have been exhausted, the applicant may file for bankruptcy. Such applications must pass various hurdles set by the courts, including a showing of financial distress, a showing that bankruptcy is the best available solution, and a showing that debtors cannot be afforded a discharge of their obligations under the conditions described in the bankruptcy petition. Such aspects are addressed by specialized bankruptcy laws.
Federal bankruptcy law provides much of the structure for today’s bankruptcy system. Much like the state and local bankruptcy laws, the federal bankruptcy law also requires that a discharge of the debt must be sought by the debtor and that such discharge must be in the best interest of the bankruptcy case. Similarly, both state and federal bankruptcy law to require that non-exempt organizations seeking bankruptcy protection must first demonstrate that they meet the standards for exemption. These requirements, however, differ from state to state.
Another important feature of the bankruptcy code is the reorganization requirement. A number of state and local bankruptcy codes have incorporated reorganization provisions. Unfortunately, the federal bankruptcy law does not incorporate reorganization provisions, at least not to a significant degree. Because of this, many persons filing bankruptcies in recent years have had to file again in order to achieve reorganization. This process can take several years, in some cases, and is not worth the effort unless it is really needed.
A variety of issues must be considered in determining whether the reorganization is a necessary step in a bankruptcy case. First, what is the status of the debtors’ other assets? What is the total amount of the nonbankruptcy debt of the creditors? Finally, what is the financial condition of the creditors? The bankruptcy law will attempt to address these issues as best it can but, as is the case with most complex legal problems, no comprehensive answer can be given in any meaningful sense without an analysis by qualified individuals, most importantly those representing the creditors.
A new trustee should then be appointed in most cases. The individual must comply with directions given by the court. One purpose of the appointment is to protect the individual’s assets and ensure that payments are made to all creditors. In addition, as part of the process for establishing the trust, the trustee must provide assurances to the creditors that payments will be made. The trustee’s report on the bankruptcy case will provide an important look at the operation of the reorganization process and the effectiveness of the trustee’s duties.
Most people familiar with bankruptcy proceedings will be aware of the possibility that both creditors and debtors can file a joint petition. A joint petition allows both debtors and creditors to share some of the responsibility for a defaulted judgment. It can be very helpful to debtors because the court does not have to consider which individual debtor filed for bankruptcy protection. A joint petition may also help to expedite the process of distributing payment assignments and other relevant information. This information will prove useful to the creditors once they begin the distribution process.
Another option for dealing with large debts is to assign the debts to one or more trustees. If a bankruptcy trustee assigned debts sells the assets of the debtor, the creditors cannot proceed until after the sale. A trustee’s report is required to identify the specific debts and assign them to either a single creditor or group of creditors. This assignment will remain in place until all debts are satisfied. The general procedure involves the trustee selling the debts to an individual purchaser at an agreed price and providing full disclosure to the individual debtor.