Bankruptcy Laws
Voluntary and Involuntary Liquidation
Concrete Experience: Sometimes back, I was able to experience a situation which made me realize how vulnerable one can be in a business. As a low income mother, I had borrowed from a bank to cater for my children’s school fees needs with the hopes that a business I was operating would in turn bring sufficient profits to cater for its own sustainable growth as well as service the loan once it was due. Due to unexpected market turbulence in the following months, I incurred unprecedented losses which coupled with the loan payment efforts, placed me on very shaky grounds financially. With time, even the loan repayment became a struggle that I could only imagine. I was forced to come to a very grueling decision. With more than 6 months behind in loan repayment, I had two options. To sell of part of or all of my assets voluntarily and pay off the debt or the bank would come in to take control of my property, sale them and recover the debt. I ended up liquidating voluntarily based on the argument that I could in that way save some of my properties.
Reflection: The experience with my loan and the liquidation process got me thinking about how the same principle could be applied in my business context. While it is true that liquidation could help pay up individual debts, it was also true that the process of getting individuals to be liquidated was strenuous and challenging. In most cases, the courts would just reject the application where the debtor had no non-exempt properties. Consequently, I had to think of an alternative route of recovering my own debts without having to taking the debtors through involuntary liquidation. I thought of how auctioning could help to recover debts; we could sell debtors properties which they had to give voluntarily as collateral for their debts, to gain those debts. The advantage of using auctioning was that both exempt and non-exempt properties could be considered for sale and the process was not as strenuous as getting an individual to be liquidated.
Generalization, Principles and Theory: From the deep reflections on the probability of using auctions to obtain my debts from clients, I came to the general conclusion that auctioning the properties of debtors could be beneficial to the business in recovering overdue debts.
Theory testing and practice: After voluntarily liquidating my assets, I managed to clear the loan and even pump more finances into my business. This time round, I was determined to ensure the business expanded through elimination of losses and reduction of down time. I came armed with the decision that no bad debts would be incurred by my business. To test my theory drawn from liquidation, I wrote a general notice to all potential debtors in my business. Each loan or other form of debt would be issued only after provision of collateral of same value. The debtor would then sign an agreement indicating that they gave the creditor the permission to get rid of the collateral after the passing of the debt expectation days. I made it clear that my business intended to eliminate all potential losses that arise due to bad debts. I also mentioned that the sale of the debtors’ properties would be handled in each case by a good auctioneer whom I had identified through research.
To effectively test this theory, I identified two key debtors and contacted them with this concern. I then contacted the auctioneer for his services. Within one month, the debtors had been issued with auction notices, barred from collecting any of their properties prior to the auction dates and given the option to pay off. One of the debtors paid off and left with his collateral while the other had his property auctioned and debts recovered. I therefore decided to adopt this strategy for recovering debts overdue for at least two months.
Bankruptcy Estates
Concrete Experience: My near bankruptcy situation made me interested in knowing more about what bankruptcy entailed. The decision to liquidate some of my properties voluntarily was made only after considering the potential impacts of my refusal to liquidate. I talked to a friend who is a financial manager and asked to be informed of what could happen if I did not pay the bank following the last warning they had issued. The friend advised me to sell of some of my property and pay up since it was possible for the bank to force me into bankruptcy. My friend told me that in case the bank decided to do this, they would take control of all my property, described as the bankruptcy estate and liquidate it before recovering the debt. I asked what the estate comprised of and my friend said it included all properties that had financial significance and that my most valued assets such as my car and house would go. I felt I did not want this to happen to me and decided to take any steps necessary for the loan to be repaid.
Having understood what the bankruptcy court considered as the ‘estate’ of the debtor, I knew that I had to protect my estate since the loan required was of much lower value than the total value of the estate that the bank would take control of. This made it imperative for me to look for a way of protecting the property for sustainable development.
Reflection: My near bankrupt situation made me think of ways in which a debtor could be made to pay off their debts. I imagined in how many ways filing for bankruptcy could be similar to auctioning a debtor’s property. One similarity that I realized is that in both cases, the estate included all property owned by the debtor and some owned by their spouse. Through the reflection, I realized that while it is possible to reduce property loss through auctioning by finding other places to store some of the personal properties prior to the day of auctioning, it is quite difficult to reduce the size of bankruptcy estates particularly if the bankruptcy case is involuntary. However, keeping assets and liquid cash under the names of people other than your spouse can help reduce the size of the bankruptcy estate.
Generalizations, Principles and Theory: Bankruptcy estates can be reduced through diversification of property description. This generalization applies where the bankruptcy case is voluntary rather than involuntary. It is theorized that most people who file for bankruptcy do so only after significantly reducing their estates and when they realize that the loss through payment of all debts would be greater than the loss incurred through filing for bankruptcy.
Theory Testing and Practice: My theory was tested through case following my personal experience. When I informed the bank that I was willing to sell off my property for debt repayment, the questions asked made me realize that the theory projection actually happens at times. The bank clearly asked why I intended to sell off my property and asked if I was interested in being declared bankrupt. I reviewed the conditions which were set for bankruptcy and then asked the bank why they expressed the need to be accurate in property reports. The agent with whom I spoke related the experience he had had with people who lied about the size of their estates and reminded me that lying to cover up some property was a legal offense.
Automatic Stays in Bankruptcy law
Concrete Experience: When I went to the bank concerning my property sales, I was armed with the bank warning that had been issued earlier. The warning indicated that in case I failed to repay my loan entirely within the stipulated time, the bank would be forced to declare me bankrupt and liquidate all my properties instead. I therefore asked the bank if there was any need to declare me bankrupt while I had the intention to pay. I was told that intention to pay is not the same as paying. I therefore asked what would happen to other people I owned and gave an example of someone who had a court case concerning an unpaid debt. My objective was to understand what would happen in case the bank declared one bankrupt and the person still had a court case with other creditors.
Based on my question, the bank agent responded by saying that once a bank obtains a court order to declare someone bankrupt, an automatic stay was issued to all courts to keep any debt related cases pending. Properties would then be sold off after a declaration of bankruptcy and used to repay all secured debts.
Reflections: If an automatic stay can help an organization to avoid its debtors before being declared bankrupt, how possible is it for debtors to wait till they have pending court cases to file for bankruptcy? I reflected a lot about this issue and came to a conclusion that if courts have rights for equal protection of all persons, the debtor has the right to be protected as much as the creditors.
Generalizations, Principles and Theory: After reflecting about the automatic stay over a long time, I have come to realize that the automatic stay can be used as a tool for defense by the debtor who may at the same time want to reduce his/ her bankruptcy estate. It would be good for courts to also consider some of the impacts on creditors’ businesses and only let the automatic stay be applicable to particular situations.
Theory Testing and Practice: I happened to relate the subject of automatic stays to a financial analyst. This was with the objective of testing whether my theory about the use of the automatic stay as a tool by the debtor. According to the analyst who is a friend of mine, this is the way financial markets work. The objective of the bankruptcy court is to find a way of satisfying the debtor as well as the creditor since both contribute to the economic growth of the country. As such, the courts consider the impacts of the debt on the creditor’s business as well as the impact on the debtor’s business. The automatic stay can only be waived after an express request of a creditor and only subject to certain conditions.
Discharge of Debts and Trustee Powers
Concrete Experience: Having experienced a near bankrupt situation and gaining enough information about the how bankruptcy operates, I decided to use this procedure to gain my finances from someone who had owe me for close to 10 years. I decided to revisit the bank and ask about the possibility of declaring them bankrupt in order to recover my debt. When I talked to the bank, I was informed to file a case, following which a review of the person’s properties would be carried out. With the case filed, I felt secured to some extent. However, the bankruptcy case was later discharged since the debtor had no non-exempt properties and only depended on his small business to cater for his needs. In addition to this, I also had some collateral although its value was less than the full debt amount. Moreover, with the discharge of the debtor, the trustee assigned the case was also discharged from responsibility. When discharged, only the personal liability for debts was covered while the collateral was taken by the creditors.
Reflection: My proximity to an almost bankrupt situation different from my own made me to ponder over all the cases in which collateral held by creditors is taken instead of their funds. The case revolved around the property of the debtor in relation to the debt owed. My key concern in this case was that in case the collateral held by the creditor was worth more than the value of the discharged debt under bankruptcy law, the creditor would have advantage over the debtor. This calls for harmonization of debts and collateral values held by the creditors.
Generalization, Principles, and Theory: In generalization, I believe that no potential debtor would give collateral worth more than the value of the debt. This would make the debt profitable to the creditor. The theory behind the discharge of debtors and trustees is that bankruptcy can only be implemented if the value of the debts and the collaterals given is equal. Similarly, bankruptcy cases can only be discharged if there is sufficient proof that the case was filed with malicious intent.
Theory Testing and practice: I observed the practice of debtor and trustee discharge effectively in the aforementioned case. This confirmed to me that the conditions for discharge of debtor and trustee are applicable in the bankruptcy law. The practice of debtor discharge and trustee discharge is only the mandate of the court and can be affected following consideration of several factors.
Distribution to Creditors and Creditors’ Claims
Concrete Experience: When I had liquidated my property and paid off the debt, I still needed funds to cater for my children’s needs as well as run my business since the money obtained was out much. I had a debtor who had taken more than 10 months before repayment. I remembered a case where a member of our family had filed a case against a debtor for lack of repayment. The said debtor was a member of our house hold and the debt had stayed for longer than the initially expected period of ten months. Consequently, the creditor took a decision to file a claim in order to recover the debt. Being a significant amount, the debtor had no intention of paying back and achieved their desire through the same court process. Being a family member, the creditor had though there was no need to sign an agreement as per the debt conditions, neither was there a witness who signed the debt agreement. The court consequently discharged the case for lack of evidence.
Reflection: After learning about bankruptcy laws and the distribution of the proceeds of a bankruptcy case to creditors, I have come to realize that the distribution strategy is somewhat similar to what I experienced in my early years. The courts use an almost similar method in distribution of the bankruptcy case proceeds in that where the funds obtained are limited, only creditors whose debts were secured are considered first. Those with unsecured debts either get their own cuts last or fail to get anything from the proceeds.
Generalization, Principles and Theory: From the experience and reflections, I have come to a general theory that no debt is worth being unsecured. This is the only sure way of getting one’s debt recovered either through bankruptcy cases or simple filing of claims.
Theory Testing and Practice: I was able to apply the same principles learnt about debts in my own business. I used this method of filing for a case to recover the debts owed and use the money for business and for my children’s needs. However, the debtor eventually decided to settle matters out of court. In addition to this, to ensure that all my debts are paid on a timely basis, I have instituted a late payment fine systems and prepared debt agreement forms in advance. These help me in that anyone desiring to receive credit has to sign against their name the amount of credit received and when to expect it back. This has helped me immensely in debt recovery since I no longer have to push my clients to pay their debts. Those who do not wish to sign the agreement forms are considered bad debtors and cannot be given any credits.
Reorganization
Concrete Experience: Since the debt paid was not sufficient for all my needs, I again borrowed money from a prominent individual without having planned it so. The creditor later filed a case against me with the intention of getting his funds back. At the court, I insisted that I had the intention of paying back the creditor and even gave a period of two years to complete making the payment. This was on the basis that I could not be able to get enough money to pay off at once and from the little I got from my business, I also had to fend for my children. Moreover, putting me behind bars would not result in debt payment; neither would it benefit my family. It was therefore more economical to let me go back to my business and continue taking care of my family while also paying the debt in installments.
Reflection: Following this experience, I was able to effectively contemplate about the role of businesses in the reorganization of debts. This brought to mind the subject of reorganization in the bankruptcy concept. As a law, it is possible for debtors to be allowed to reorganize themselves and pay off their creditors later. Similarly, corporations can also reorganize in order to pay off their debts. I also thought about how this could be applied in the individual business context and realized that with a stable business agreement format, it is possible to understand from the beginning that a debtor would not be able to pay at once and would rather pay in installments. I knew from this that this strategy can help a business stabilize by avoiding potentially bad debts.
Generalization, Principles and Theory: From the comparison of the personal experience and the reflection about the aspect of reorganization in bankruptcy law, I have come to the general conclusion that despite what the debt may be about, it is possible to be let go and be allowed to work off and pay the debt at later stages. If the courts allow this practice in cases of bankruptcy, how much possible is it for individuals to use the same?
Theory Testing and Practice: Having realized that there is no economic benefit to letting a debtor go if they agree to pay in installments, I have applied the same principle in my business and encouraged other business people to do the same. It would be more beneficial to both the debtor and the creditor because in the end, the debts get paid. If the creditor understands from the beginning that the debt would take longer to clear, it may also help to eliminate mistrust between the debtor and the creditor.