Insolvent customers generally choose to file bankruptcy under one of three chapters of the Bankruptcy Code:
Chapter 7, Chapter 11, or Chapter 13. Chapter 7 involves liquidation and closing of the business, while Chapters 11 and 13 authorize the financial reorganization of a corporation (Chapter 11) or an individual (Chapter 13).
Liquidations may or may not include distributions to creditors, depending on whether there are assets to sell or recover. The bankruptcy trustee, who is appointed with the approval of the bankruptcy judge, has control over the sale of the debtor’s assets and must obtain court permission before taking action.
Secured creditors have first rights to claim the debtor’s assets or the proceeds of the sale of the assets. Then, if there is anything left, the unsecured creditors’ claims will be paid, in whole or in part.
Debtors in bankruptcy must list all their creditors and financial obligations in the court papers in order to be able to discharge their debts.
The creditors, on the other hand, must file a proof of claim with documentation of the balance owed to them. A 341 hearing, named after Section 341 of the Bankruptcy Code, is held in the bankruptcy court after the bankruptcy filing to give creditors an opportunity to question the debtor on topics such as the debtor’s business plan going forward, the current and future leadership of the company, and how the debtor’s assets were handled prior to the bankruptcy.
It also gives creditors an opportunity to object to certain of the debtor’s proposals, such as how much the debtor plans to pay creditors each month, or the proposed sale of certain assets.
Be sure to read about preference claims in the FAQ section below.
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