Restructuring debts

With the economy facing a downturn, there have been a number of business and enterprises owners who have been facing issues meeting their obligations, oftentimes due to usurious or otherwise excessive fees and penalties from their creditors and note holders. Due to the low availability of capital funds and a low selling environment, business are unable to sustain once substantial cash flows on which was the basis for the debt which was issued. These debts incurring interest and costs become unserviceable causing loss of faith & reputation from creditors, and puts debtors in the untenable position of deciding which debts to pay.

Having piled on huge amounts of debt, it slowly eats away the earnings and lands the owner with high leverage which further puts an individual at the mercy of creditors. In such a situation even a fundamentally sound business may be unable to operate and will only incur losses. Also the assets of the owner are seized to repay debts. Hence to avoid foreclosure of property and seizure of assets it is advisable to seek a legal shelter by filing for bankruptcy protection, including a court compelled organization.

Bankruptcy filings

The United States Bankruptcy code comprises of different bankruptcy chapters which define the scenarios where an individual or business entity may seek protection from creditors. The most common bankruptcy filings are Chapter 7, Chapter 11 and Chapter 13. Chapter 7 Bankruptcy deals with the complete liquidation of the business while chapter 11 & 13 both deal with reorganization of debt. The difference between the two being that Chapter 11 bankruptcy can only be filed by an existing business or enterprise, whereas Chapter 13 is filed by individuals who earn a steady income and may or may not own a business stake.

Chapter 13 Mechanism

Upon filing for chapter 13 bankruptcy, an impartial third party Bankruptcy trustee is appointed. The trustee acts analyses the current financial situation of the individual, the individual’s assets and business’s if any. Using this information the Bankruptcy trustee formulates a repayment plan for the individual to make it easier to meet and fulfill obligations within a set time period of 3 to 5 years. The payment plan advised by the trustee usually consists of reorganizing the debt burden into one single periodic pay out. The payment is made towards the trustee who further distributes it amongst the creditors on a priority or pre – determined basis.

Eligibility criteria

Certain conditions have to be fulfilled to be able to file for Chapter 13 Bankruptcy

    • Can only be filed by an individual earning a regular income, which may be either in the form of wages, salaries, social security benefits, alimony, royalties etc.
    • You would be ineligible in case you have debts exceeding a certain level. The current debt limit is $1,010,650 for secured debts and &336,900 for unsecured debts. These values are adjusted to keep up with inflation.
    • Chapter 13 requires that the applicant has been submitting federal and state income tax filings for a minimum of 4 years prior to the application date.

Persistent Creditors

With persistent creditors trying to get hold of you and piled with a heavy debt burden, the going may get difficult. Filing for chapter 13 bankruptcy could be a blessing in disguise as the vested powers of trustee not only help restructure debts to give a more feasible solution, they also keep away creditors from pursuing you for a stipulated time interval.

While every situation is different and bankruptcies are fact intensive to the particular issues faced by an individual or company, the typical bankruptcy restructuring is for the Court or Trustee to review the individual or company’s ability to pay over a five year period. In a restructuring all the debts are combined into one and usually only a nominal interest rate (or no interest at all) is charged on the organized debt

It is highly advisable for you to consult an attorney in order for you to maximize your benefits provided under the law.