Chapter 7 and Chapter 13 are two common bankruptcy programs available to individuals to discharge their debts. If you ever got confused between the two, here is a quick what, when, and why to help you learn their differences.
What is Chapter 7 Bankruptcy?
Chapter 7 bankruptcy is a liquidation bankruptcy. Your non-exempt assets are sold by the court trustee to repay your creditors.
When is Chapter 7 Bankruptcy Needed?
When your debt becomes completely unmanageable, and you want a quick discharge to restart your financial life.
Why is Chapter 7 Bankruptcy Important?
It helps eliminate the risk of debt trap that, otherwise, individuals could fall into if they can’t keep up with the repayments.
What is Chapter 13 Bankruptcy?
Chapter 7 bankruptcy is a reorganization bankruptcy. Rather than a discharge, your repayment schedule is reorganized based on what you can actually pay.
When is Chapter 13 Bankruptcy Needed?
When you are struggling to repay your debt but don’t want to risk losing any of your assets.
Why is Chapter 13 Bankruptcy Important?
It allows you to prevent foreclosure or selling off of your assets by creditors by making repayment more manageable.
Declaring bankruptcy has significant effects on a public company, including severe consequences for its investors. This decision is often derived from cripple debt that the public company cannot pay back under the current terms of agreements. Hence, declaring bankruptcy is the only way for the company to save itself and start running again after facing some considerable losses.
How Do Companies Declare Bankruptcy?
Federal bankruptcy laws determine ways to deal with a business that has declared bankruptcy and governs how the debts of a business will be divided. The two types of bankruptcies that businesses can file for are Chapter 7 and Chapter 11 bankruptcy.
Chapter 7 bankruptcy allows businesses to conduct a “going out of business sale” to generate money so that the company’s debts can be paid off. Chapter 11 bankruptcy, on the other hand, is when a company wants to reorganize its business and categorize the debt so that it can survive and introduce a new business model. If a company files for this kind of bankruptcy, it is allowed to run the day-to-day business but needs the bankruptcy court’s permission to make significant business decisions.
What Happens to the Company’s Stock?
Regardless of the type of bankruptcy that a company chooses to declare, their current stock becomes useless. This is because the common stock, also known as the equity in a company, does not receive much in the bankruptcy proceeding. Creditors, such as bondholders, suppliers, and employees need to be dealt with before the common stockholders.
You might have noticed the “Q” placed on a ticker symbol. This shows that the company is going through bankruptcy proceedings. It is seen as an end mark to investors as even if the company manages to reorganize, its plan automatically cancels all existing shares of common stock. Even after the new stock is issued, the company’s reorganization plan will trade without the “Q,” but the old stock will still retain the “Q.” This often confuses the investing public.
How Stock is Traded After Bankruptcy
As mentioned above, a company can still trade its common stock despite filing for bankruptcy. However, they are often unable to meet the listing standards of important exchanges. Hence, they are required to go to the OTC Markets along with the “Q” attached to their ticker symbol.
It is important to keep in mind that the federal law does not prohibit a company from trading just because it is in the midst of bankruptcy proceedings.
Investing in a Bankrupt Company
Some investors may want to buy or hold the bankrupt company’s common stalk thinking that the company may reemerge, and they would be able to gain the rewards.
However, this is not a smart move. There is no indication that old investors receive any benefits from the organization. In fact, they may incur losses as the old common stock depreciates and holds no real value. The priority scheme set by the federal bankruptcy laws determines that bondholders are to be paid before stockholders because the holders of common stock are at more risk.
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When someone dies, the loss is heavy for family members, friends, and loved ones. Emotions are strong, and everything seems haphazard. However, what’s worse is when, amidst the chaos, there are legal issues to deal with that arrive if a debtor died after declaring Chapter 7 or Chapter 13 bankruptcy.
If you are an heir or successor of your loved one, the chances are that their estate will be passed on to you. However, this only happens if the debt is a joint debt between the deceased and the heir. Once a debtor passes away, creditors will line up to seek the deceased’s assets by selling the estate or getting their hands on anything that will help satisfy the remaining debt. This means that less amount of assets are left for loved ones.
Death and Chapter 7 Bankruptcy
When a debtor passes away during bankruptcy, we assume that the bankruptcy case is automatically closed, and debts are automatically discharged. However, this is not the case. Since the bankruptcy trustee has the responsibility of liquidating assets to pay back creditors, the bankruptcy involved in Chapter 7 bankruptcy does not impact the proceedings.
This means that the process would continue the same way as it would if the debtor was alive. The trustee has to sell off assets to ensure the creditors get paid. However, creditors may still be interested in the debtor’s estate if their debt has not been fully satisfied. This usually comes under bankruptcy discharge, meaning that this bankruptcy wipes out qualifying debt, such as credit card balances, medical bills, and personal loans.
Death and Chapter 13 Bankruptcy
When a debtor is involved in Chapter 13 bankruptcy, his death has more of an impact than if he was involved in Chapter 7 bankruptcy. For someone who partakes in Chapter 13 bankruptcy, his debt is eliminated through a pre-approved repayment plan. If the debtor dies, a trustee or personal representative will overlook the Chapter 13 bankruptcy. A Chapter 13 debtor has to make payments every month to the bankruptcy trustee for a period of three to five years until the repayment plan has been completed. In case he fails to do so, the court will automatically dismiss the case.
In this case, the trustee of the deceased would be presented with the following options:
Dismiss the Case
The most common option is case dismissal. This means that if a debtor passes away during Chapter 13 bankruptcy, the surviving trustees will allow the case to get dismissed so that creditors can take over the deceased’s estate and fulfill their credit.
Request a Hardship Discharge
Before all essential Chapter 13 plan payments have been completed, the court may grant a hardship discharge. In this case, the creditors will receive the same amount as in a Chapter 7 case. The value of the deceased’s property will not be protected with a bankruptcy exemption.
Conversion to Chapter 7 Bankruptcy
Surviving trustees can request the court to convert the case to a Chapter 7 bankruptcy so that they can receive a discharge. While some courts do not allow this, it purely depends on the court and the judge.
Move on with Chapter 13 Bankruptcy
Courts have the authority to proceed and conclude the Chapter 13 bankruptcy, pretending that the debtor has not passed away.
To know more about how Chapter 7 and Chapter 13 bankruptcy can impact individuals, schedule a free 1-hour consultation click here.
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