Key Concepts and Types of Bankruptcy Litigation
In this article, let’s understand the key concepts relating to bankruptcy and the types of bankruptcy litigations that exist.
The 21st century has made life easier by giving you access to many resources, one of them being quick access to credit. 82% of the population in the United States owns credit cards and 23.9 million Americans have a personal loan and 70% of the businesses also have some outstanding debt. Most of their services are available at a single click and you end up relying on loans and credit cards for everyday purchases or business needs.
However, with debt comes the obligation to pay interest, which can become overwhelming if finances aren’t managed well. When the debt gets difficult to manage, filing for bankruptcy becomes the last resort. The United States of America saw a total of 452,990 bankruptcy filings by the end of 2023, which is a 16.8% increase from 387,721 cases in 2022.
In simple terms, filing for bankruptcy helps you if you’re unable to meet your debt obligations. It gives you a fresh start by forgiving debts you cannot repay and allows creditors to recover what they’re owed through any assets you have.
For most bankruptcy filings in the United States, you file the paperwork and receive an order that erases eligible debts. However, there can be situations where interested parties like you, your creditors, and the trustee can find yourselves in a full-blown bankruptcy litigation.
Types of Bankruptcy Filings
Filing for bankruptcy can help you by reducing or eliminating your debt. Each bankruptcy filing addresses different financial circumstances. Let’s look at some of the common ones:
Bankruptcy Filing Chapter | Name of the Bankruptcy | Description |
---|---|---|
Chapter 7 Bankruptcy | Liquidation Bankruptcy | It is generally filed by individuals. A trustee is appointed by the US court who oversees the sale of assets to pay off creditors. This filing stays on your credit report for 10 years. 2024 witnessed a total of 8102 bankruptcy filings, almost a 32% rise from 2023. Out of these 70% filings have been discharged. |
Chapter 13 Bankruptcy | Repayment Plan | This chapter is for people with a steady income and requires some more time to pay their obligations. The limit for unsecured debt is $419,275 and secured debt is $1,257,850. 2024 saw a total of 4667 cases, out of which 1700 have been discharged and 1862 have surprisingly been dismissed. |
Chapter 11 Bankruptcy | Large Reorganization | It is used by businesses as well as high earning individuals to reorganize their debts as they continue their business operations. High-debt individuals and investors can choose this option if they don’t qualify under chapter 13. |
Other bankruptcy filings that are not so common are Chapter 12, 15 & 9. Chapter 12 helps family farmers and fishermen set up repayment plans with higher debt limits. Chapter 15 deals with international bankruptcy cases and Chapter 9 is for municipalities.
Parties involved in a Bankruptcy Litigation
But before we dive into the types of legal disputes during bankruptcy litigation, let’s understand about the parties that can get involved in a bankruptcy litigation:
- Debtor – The individual or business that has filed for bankruptcy to get relief from their debts. The debtor owes money to various creditors.
- Secured Creditor – A creditor is owed money and holds a secured interest in the debtor’s assets. This means that if the debtor defaults, they can claim proceeds from specific collateral like real estate, inventory, or equipment.
- Unsecured Creditor – A creditor owed money by the debtor but has no collateral backing the debt. If the debtor fails to pay, these creditors have no direct claim to any specific assets.
- U.S. Trustee – The U.S. Trustee Program oversees bankruptcy cases to ensure proper administration. They monitor Chapter 7 and Chapter 11 cases.
Procedural Elements in Bankruptcy Litigation
Bankruptcy litigation follows certain rules and practices that distinguish it from typical civil cases. Few common examples are:
- Automatic Stay – This feature halts all creditor collection actions against the debtor once the bankruptcy case is filed to protect the debtor’s assets. Creditors can request relief from this stay if they believe their interests are at risk.
- Discharge – Discharge is a term used during bankruptcy cases. It means releasing the debtor from any personal loans. These loans are forgiven and they are no longer required to pay off those obligations.
- After Notice and a Hearing – This phrase in the bankruptcy code allows certain actions to proceed without a hearing if there’s no objection simplifying the litigation.
- Evidence and Testimony Rules – Bankruptcy courts apply evidentiary rules. Many cases depend on attorney representations or “testimony from the podium” rather than sworn witness testimony.
Strategies to Avoid Bankruptcy
To effectively avoid bankruptcy, individuals can implement various proactive strategies to manage finances, reduce debt, and increase income.
Here are key strategies to consider:

Know Your Financial Situation
Before applying any debt management strategies, take a good look at your current financial situation. You can start by evaluating your financial statements and take a good look at your cash flow statements to understand your cash position. You must know the breakup of profit share each product generates. Also make sure you know the revenue cycle for each and every product.
Once you know all the smaller details, it gets easier to come up with a solution to avoid bankruptcies.
Use Accounts Receivable Factoring
Accounts receivable factoring is a method that helps you to maintain cash flows and reduce financial strain. Accounts receivable factoring involves sale of invoices to a factoring company at a discount in exchange of cash.
You can maintain liquidity in your business while also timely payments to suppliers and other stakeholders.
Cutting Costs and Unnecessary Expenses
This is one of the most important steps for individuals as well as businesses. Identify areas where you are making unnecessary expenses. Expenses like business travels and meetings that can be done over zoom calls should be avoided. You can also engage in discussions with your suppliers to get better payment terms and bulk purchase discounts.
Multiple Revenue Streams
Don’t rely on a single revenue source for your business. If your business revenue is dependent on a single client or a single product, it’s about time to expand your customer base as well as product offerings.
A single revenue stream is extremely detrimental to your business. You can join in with other businesses to set up a syndicate and get mutual advantages. Joint ventures and forming alliances can give you access to new markets and improve your competitive position.
Alternative Financing Options
Instead of filing for bankruptcy you can take small business loans and participate in crowdfunding platforms. Some other options are asset-based financing where you can use your assets like inventory, equipment, or real estate to get a loan.
Many banks also offer working capital loans that are designed to cover day-to-day expenses such as inventory and payroll management.
Debt Management
Lastly, you can undertake debt restructuring and modify your repayment terms, reduce interest rates, and extend payment timelines. Merging multiple debts into a single loan can help to simplify your repayment and makes your debt more manageable.
Conquer Bankruptcy Litigation with Eqvista
Companies that face financial distress, often end up witnessing bankruptcy litigation at some point. No founder or individual wishes to undergo bankruptcy litigation, but it is a powerful tool that protects the interests of the debtors and the creditors.
Bankruptcy litigation requires proper assessment of risks and opportunities, along with an accurate asset valuation to ensure maximum debt is recovered.
In such a high stake scenario, partnering with a valuation service provider like Eqvista is recommended. At Eqvista, we understand the complexities bankruptcy can bring to your work environment. Our team is here to help you through every step so that you can tackle litigation with precision and strengthen your legal case.
Contact us to know more.
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