Bankruptcy: What to do when a debtor threatens or files for bankruptcy?

Most credit managers at one time or another have heard a debtor threaten to file for bankruptcy if legal action is vigorously pursued. Knowing what a bankruptcy is and what your options are as a creditor can help clear up the mysteries surrounding this seemingly complicated process. What is bankruptcy? Bankruptcy is a form of relief available to individuals and corporations pursuant to Article I, Section 8 of the United States Constitution which grants to Congress the power to establish "uniform laws on the subject of bankruptcies throughout the United States." The Bankruptcy Code and Rules are governed by the laws set forth in the United States Code, which Code includes the Bankruptcy Code. Generally, bankruptcy provides an individual with a fresh start, allowing them to discharge all unsecured debts, or an opportunity for the individual or company to reorganize their debt in the hopes of paying their creditors a reduced amount over a prescribed period of time as set forth in their bankruptcy plan. What are the typical types of bankruptcies? Chapter 7 - Liquidation - A Chapter 7 is the simplest and one of the most common forms of bankruptcy in which the non-exempt assets are sold by a court appointed trustee who then pays all unsecured creditors a pro-rata dividend based upon the amount of funds recovered from the sale of the debtor's assets. If the Chapter 7 debtor is an individual, the bankruptcy proceeding generally ends with the debtor being granted a discharge. If the Chapter 7 debtor is a corporation, the bankruptcy proceeding ends with a dissolution of the corporation or business. Chapter 11 - Reorganization - Typically a Chapter 11 is used by corporations or extremely high net worth [...]