Question

Explain the conditions that might make bankruptcy necessary. How might you use the services of a credit counselor?

Answer 1

An organization is technically insolvent when it is unable to meet current obligations even though the value of its assets exceeds its liabilities. Insolvency denotes a lack of liquidity.

Chapter 11 provides a debtor company the opportunity to restructure its business. A variety of actions may be used, such as the restructuring of existing loans, acquisition of new financing with a priority of company earnings, rejection of specific contracts, and the cancellation of certain contracts. During the period of reorganization, the automatic stay provision requires all creditors to cease collection attempts. The court must approve the reorganization plan and may convert the case to a Chapter 7 liquidation if it is in the best interest of creditors.

Chapter 7 involves corporate liquidation of assets. In liquidation, a trustee normally is appointed to handle the administrative aspects of the bankruptcy procedure. The trustee arranges a meeting of the creditors. The trustee liquidates the business and pays the creditors according to the priority of claims set forth in Chapter 7.

Credit counseling provides guidance and support on consumer credit, money and debt management, and budgeting. The objective of most credit counseling is to help a debtor avoid bankruptcy and to provide primary financial education on managing money.If a consumer’s financial problems resulted from too much debt or inability to repay their debts, a credit counseling agency might recommend enrollment in a debt management plan (DMP). A certified credit counselor will review a consumer's overall financial situation and offer customized money management advice. This advice may include a DMP designed for the client's unique circumstances.