LEGAL GUIDE
Written by attorney Gregory Garth Brown

The Workings of a Bankruptcy Proceeding

The Workings of a Bankruptcy Proceeding

With the current state of the economy, many people and many businesses have had no choice but to file for bankruptcy. What is bankruptcy, though? Bankruptcy is a legal proceeding involving a person or business that is unable to repay outstanding debts. Many of you may be wondering how a bankruptcy process works. This is a short guide that may help you understand what to expect if you are thinking of filing for bankruptcy.

The bankruptcy process begins with a petition filed by the debtor (most common) or by and attorney on behalf of creditors (less common). The petition will request relief under one of the chapters of the Bankruptcy Code. The most common forms of bankruptcy are chapter 7 and chapter 11.

Chapter 7 filing is where a debtor’s assets (except those that the debtor is able to get exempted) are converted to cash and distributed to his creditors. Chapter 11, on the other hand, is commonly used for businesses because it allows a business to continue operations, but reorganize with the goal of eventual repayment of its debts in full or in part, according to the reorganization plan. For more information on Chapter 11 Bankruptcy filings, please see our blog on the issue: Motion for Relief from Stay –- GRANTED

Regardless of what which chapter you file, the filing of a bankruptcy petition triggers the creation of a bankruptcy estate. A bankruptcy estate is a separate legal entity that consists primarily of a debtor’s legal and equitable interest in property as of the date of filing. Also included in the petition is a list of assets and liabilities, including assets that are exempt from a creditor’s claims.

The filing of the petition also means that an automatic stay is imposed against all of the debtor’s creditors. This means that creditors are prohibited from doing any act or commencing any proceeding to collect a claim against the debtor or the debtor’s property.

If you choose to file a Chapter 7 bankruptcy petition, then a trustee will be appointed to your case. The trustee will take possession of your property, sell it, and distribute the proceeds to your unsecured creditors (like credit card companies). If you have a loan on a property and have used that property as collateral for the loan, then the trustee will sell the property and use the proceeds to pay the creditor who holds the security interest in that property. If there are any excess proceeds from the sale of that property, those excess proceeds will be used to pay unsecured creditors (like credit card companies).

Once the trustee has distributed all of the proceeds and made a full report to the bankruptcy court, then your bankruptcy case will be closed, and you, as the debtor, will be relieved of debt obligations incurred prior to filing for bankruptcy.

Please remember that this guide is meant to give a general idea of what a bankruptcy proceeding will be like. If you plan to file for bankruptcy or may be in any way involved in a bankruptcy proceeding, please contact an experienced attorney in your area.

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