Monday, July 19, 2010

Bankruptcy Chapters 7, 11 and 13 and What It Means for You

In very simple terms, Chapter 11 and Chapter 13 bankruptcies are sought by businesses (11) and individuals (13) whose cash flows are insufficient to service their existing debt.  The goal of a Chapter 11 or 13 bankruptcy is for a business or individual to re-organize their debt, such that all or most of the debt is repaid according to a schedule set by a judge, which schedule gives the debtor more time to catch-up on its debt.  A Chapter 7 bankruptcy is used to eliminate all of the debt in the case where a debtor is far too insolvent to ever realistically catch-up.  In this case, the debtor is liquidated (all but a few protected assets are sold), and creditors generally only collect a fraction of the amounts owed to them.  Please keep in mind that this is an oversimplified explanation and that bankruptcy law is extremely complex and often undergoes substantial change.

As a title company representative, finding out that a seller is involved in a bankruptcy often raises concerns about insurability.  Regardless of the type of bankruptcy, property CAN be sold out of a bankruptcy upon approval of the court.  In that respect, the bankruptcy court is not much different than a lienholder whose release needs to be coordinated with closing; however, the approval of the court could take as long as 90 days to obtain, which will delay a closing much beyond that of a non-bankruptcy sale.