The last resort: what happens when your borrower files bankruptcy?

RMA Journal, The, Sept, 2003 by J. Tol Broome, Jr.

* Books, tools, and equipment used for business of up to $1,750.

* Personal jewelry of up to $1,150.

* Other personal property (other than jewelry), such as furniture, clothes, appliances, and books of up to $9,300, but with no one item valued higher than $450.

* Other personal property up to $925, with an additional amount of up to $8,725 allowed to be used for debtors who do not use the homestead exemption.

* Prescribed health aids, such as eyeglasses, dentures, and hearing aids.

* Equity in a life insurance contract that has not matured of up to $9,300.

* Federal and state benefits, such as Social Security and other entitlements.

* Right to receive crime victim award payments, dependent payments from life insurance contracts, wrongful death payments, and personal injury payouts of up to $17,425.

* Certain pension plan payments that support the debtor or dependents.

Order of claims in a Chapter 7. The trustee establishes the order of claims to be paid in a Chapter 7 filing. There generally are eight classes of claims, listed in order of priority:

1. Secured claims, which are paid from the liquidation of the assets securing those debts.

2. Administration and collection expenses, such as court fees and attorney fees.

3. Claims arising in the normal course of business after the debtor files but before a final trustee has been appointed.

4. Employee wages and salaries, with a $4,650 maximum per employee for wages earned within 90 days of filing by the debtor for whom the employees worked.

5. Payments into employee benefit plans, up to $4,650 per employee, made within 180 days of the filing.

6. Claims arising from deposits, up to $2,100 per consumer, made by individuals for goods not delivered or services not performed by the debtor.

7. Taxes and penalties due up to three years before the bankruptcy filing date.

8. All other unsecured claims for which proofs of claim have been filed.

Chapter 11

A Chapter 11 bankruptcy normally is filed by a business entity. It can be done voluntarily by the business, but it also can arise from an involuntary filing brought about by unpaid creditors. An involuntary filing typically occurs when a creditor feels a debtor is taking an action that will impair its ability to repay or that will impair the value of the collateral that secures loans to the creditor(s).

Chapter 11 reorganization plans often are quite drawn out in time and expense. The three key parties involved--debtor, court, and creditors--must ultimately come to an agreement over how the debtor will attempt to repay the creditors.

There are five steps in any Chapter 11 procedure:

1. Order of relief. The bankruptcy court issues an order of relief, which essentially means that the Chapter 11 filing becomes "official." The order of relief is automatic in a voluntary filing. However, in an involuntary filing, the debtor is allowed time to offer objections to the need for a Chapter 11.

2. Creditor committee. A committee of creditors is appointed by the bankruptcy court.

3. Reorganization plan. The debtor is given an exclusive period of 120 days to file a plan of reorganization. Extensions are often given, so this process can take even longer. The basic premise of any plan of reorganization is to get as many creditors as possible to agree as quickly as possible to a repayment plan. The creditors also may file a separate plan, or they may choose to accept the debtor's plan or suggest revisions to the debtor's plan.