There are 6 basic types of bankruptcy cases provided for under the Bankruptcy Code, each of which is discussed in this article. The cases are traditionally given the names of the chapters that describe them.
Chapter 7 bankruptcy (Liquidation) encompasses two main rules. First, Chapter 7 does do away with legal obligations of the debtor to satisfy debts existing when the bankruptcy was filed. Second, the debtor’s property will be taken and sold to pay the creditors. In order to qualify to file for a Chapter 7 bankruptcy, there are several stipulations. The debtor must qualify financially using the “Means Test”. The debtor must not have had a case dismissed within the last 6 months. Also a person cannot eliminate debt via a Chapter 7 bankruptcy if a Chapter 7 was filed within the last 8 years or a Chapter 13 within the last 6 years.
Chapter 9 bankruptcy, entitled Adjustment of Debts of a Municipality, is designed for “municipalities” such as cities, towns, counties, taxing districts, and school districts. Chapter 9 bankruptcy allows for the reorganization of debt by extending the repayment timeline. This allows the debt to be refinanced or a principal or interest reduction on existing debts.
Chapter 13 bankruptcy, entitled Adjustment of Debts of an Individual with Regular Income, allows individuals with a regular income to devise a plan to satisfy all or a portion of their debt. Debtors offer a repayment plan that allows for installment payments lasting over a typical timeframe of 3 to 5 years.
Chapter 11 bankruptcy, entitled Reorganization, is available to partnerships, corporations, and individuals. It is typically the bankruptcy filed by large businesses that wish to restructure debt. There are no limits on the amount of debt, as with Chapter 13 bankruptcy. Due to their simplicity and lower cost, individuals usually file for a Chapter 7 or Chapter 13 bankruptcy, instead of a Chapter 11 bankruptcy.
Chapter 12 bankruptcy, entitled Adjustment of Debts of a Family Farmer or Fisherman with Regular Annual Income, is only available to family farmers or family fishermen. Chapter 12 was put together in response to difficulties faced by farmers and fishermen in the 1980s. While it has some similarities to that of a Chapter 13 bankruptcy, it offers more flexibility with the payments. This helps to understand how nature and seasonal periods affect the uniqueness of these operations. Chapter 12 bankruptcies are typically less expensive that Chapter 11.
Chapter 15 bankruptcy is probably the least known type of bankruptcy. Added to the Bankruptcy Code in 2005, Chapter 15 bankruptcy (Ancillary and Other Cross-Border Cases) offers the opportunity for foreign debtors to access U.S. bankruptcy courts.
Source: Bankruptcy Basics, http://www.uscourts.gov/services-forms/bankruptcy/bankruptcy-basics
Let us say, you slipped and fell on a wet spot or had a forklift run over you. You might file a lawsuit and be offered a “Structured Settlement.” Should you take it?
What is a Structured Settlement?
Robert Stammers of Investopedia has defined a “Structured Settlement” as a financial agreement that pays you gradually over a set period of time after you win a personal injury lawsuit. It kind of works like the lottery where you can choose the lump sum payment or the monthly payments. The monthly payments option is a “Structured Settlement.”
The insurance industry uses the term “annuity” for this type of arrangement. This will pay for pain and suffering, lost wages, hospital bills, recovery and rehabilitation. You may even need extra money to pay for medical alert systems with fall detection if you’re older and are suffering from an injury.
Types of Structured Settlements
Generally, you can choose either the “Buy-and-Hold” or “Assigned” method for ownership. With the “Buy-and-Hold” method, the winning party purchases an annuity. With the “Assigned” method, the annuity will be purchased by a third party.
You can also select different “Installment Payment Arrangements.” Choose to have equal or unequal payments each month.
The “Inflation Adjusted” settlement will ensure that your money receives a cost of living adjustment (COLA). You can link your annuity to a stock index. There is also a “Future Care” settlement option.
Advantages of Structured Settlements
Each individual will have his own special circumstances. If the injured party (plaintiff) is a minor, senior citizen or disabled (temporarily or permanently), then a structured settlement might be the best way to go. This can be placed in a trust and used to pay for on-going expenses.
Why wouldn’t you simply take the lump sum payment?
The primary benefit of the “Structured Settlement” is its federal tax-deferred status. If you receive a large lump sum payment, then the tax rate is likely to be very high. When you are paid over time, then your tax bill is likely to be lower.
The annuity is also better for those who are not financial management experts. Basically, if you have loose cash by itself, it is not earning any real returns. With an annuity, the insurance company can invest the money, until you need it.
Disadvantages of Structured Settlements
The problem with a structured settlement is that it might not cover your full monthly expenses. Of course, the same can be said for a lump sum payment. With a lump sum payment, you have more control over the funds. You also cannot modify a structured settlement.
Structured Settlement Secondary Market
If you want to raise money quickly, you could resell your annuity on the secondary market. Some individuals or organizations might offer 40% of the full amount. Be very careful because there are legitimate and illegitimate buyers.
Running a successful company is hard because there are so many things that go into making sound financial decisions. It can be difficult to assume everything will work out when there is so much at stake in terms of your company, workers and all of the assets put into the corporation. This is why financial modeling is so popular among company owners looking to plan for their future.
What is Financial Modeling?
Financial modeling is a corporate process that is used by companies to represent a future financial situation. It gives the company a sense of security in terms of making important decisions regarding their monetary investments. The model is normally characterized by calculations of supposed sales, expenditures and investments and will give recommendations based on this information. The model will ultimately summarize events for the user in terms of investments and market direction.
Who Does a Financial Model and How is it Done?
A corporate analyst will be the one who performs the financial model for a company who needs this data. They will accurately forecast future earnings and expenditures based on the current performance of the company in question. There are an array of theories within an analysis, but the professional is able to test these theories to come out with a final end result on what is most likely to happen to the corporation. They do their best to capture all types of variables in a given situation, giving the company owner a chance to see how their endeavors will work out in the end. Once finished, the analyst will give a mathematical depiction of business events that could occur in the near future. Spreadsheets are often used to perform these calculations and company owners will be given the results upon completion.
Who Uses Financial Modeling?
Financial modeling is used for a variety of reasons. One of the most common reasons to make use of an analyst specializing in financial modeling is for business valuation and strategy planning. It prevents you from making bad business deals and losing assets because of making these unnecessary decisions. You might also want to use a financial model before starting a project because you need to know its success before putting your money into it.
Because running a corporation or small business is risky, a professional financial model takes the guesswork out of your work. Even though the analyst charges a fee to create these spreadsheets and do the math, it is well worth it considering how much you can save by avoiding bad deals and investments. If you are going to be starting a project or are looking to see into the future of your business endeavors, a financial model is your best bet and can totally transform your company. Small mom and pop businesses as well as large conglomerates can make use of financial modeling with similar success. The key is to hire a professional who does this type of work and provide them with any information regarding your brand.
What is Credit Counseling?
Credit counseling is a service that helps people resolve their money problems. Counselors are trained to review a person’s entire financial situation and offer the appropriate solutions. There are many government-approved agencies that offer credit counseling. However, you can get low-cost services from nonprofit agencies, religious organizations, extension offices and non-profit agencies. You can get credit counseling in person, over the phone or online.
It is important for you to make sure that the agency you choose is accredited. The National Foundation for Credit Counseling and Financial Counseling Association of America are two of the organizations that accredit credit counseling agencies.
How to Prepare for Credit Counseling
You will need to gather all information about your financial situation. This includes things such as your paystubs, household bills and credit card bills. You should also write down the cost of things like food and transportation. The more information provide, the more your counselor will be able to help you.
What to Expect During Credit Counseling
When you meet with your credit counselor, your debts and personal financial situation will be discussed. Your counselor will also review your budget and determine if there are ways that your expenses can be trimmed each month. Your credit counselor can also help you find effective ways to manage your debt.
Benefits of Getting Credit Counseling
You will be able to manage your finances better if you go through credit counseling. This will help you reduce your stress. You will also be able to get out of debt faster. Furthermore, your credit counselor understands that everyone’s financial situation is different. That is why they will give you the personalized attention that you need.
What if I Need to File for Bankruptcy?
Many people are able to avoid bankruptcy if they get credit counseling. However, some people are still unable to control their finances. That is why bankruptcy may be the best option. Your credit counselor can still help you if you need to file for bankruptcy. They can help you get a clear understanding of all of the consequences of this.
Bankruptcy has serious consequences. It can stay on your record for up to 10 years. During this time, getting any type of credit may be difficult. You may also have a harder time finding a job. Your credit counselor can help make this process go a lot more smoothly for you.
Basically, debt settlement is when you pay less than the amount originally owed on a debt. Debt settlement differs from a bankruptcy, where the entire debt is wiped out; or, debt consolidation where you take several debts and consolidate them into one loan. Debt settlement is somewhere in the middle and is used for unsecured loans.
It is possible for individuals to negotiate directly with their lender to reduce the amount of the loan. However, there are companies out there that will gladly help with the negotiations, for a fee of course. If someone has several credit cards, each with a several thousand dollar balance, having a company take care of all the negotiations is worth the cost.
How it works
The way most debt settlement companies work is the consumer pays the debt settlement company a set fee each month. When the company has a sufficient amount of funds they will contact the lender and offer a reduced amount on the debt. The lender may or may not accept the offer. If they accept the offer, the loan is paid and the debt settlement company will move on to the next lender after the balance has built back up.
This process will repeat until all of the debts have been settled. For someone who is drowning in debt, this may seem like an ideal solution to their overwhelming debt problem. However, as you might expect, there is a downside to debt settlement. In fact, there are several issues to consider before deciding to go this route.
Debt settlement will damage your credit score. Companies will not negotiate on a current account; in order to qualify a person would need to be behind on their payments. Hiring even the top debt settlement companies will not stop the collection calls or, the interest charges. When you are paying the debt settlement company, you are not paying the creditors.
When a company decides to settle a debt they are essentially giving the consumer the difference as a gift. So for instance, someone owes $10,000 on a credit card and the company agrees to take $5,000 to pay it off. That other $5,000 is treated as income to the consumer and they will be issued a 1099 at the end of the year. Companies are required to issue a 1099 for any amount over $600 and it is taxable income.
Before considering debt settlement, it is best to do plenty of research ahead of time. Check out the debt settlement company with the Better Business Bureau (BBB) to see if there are any complaints. Go to their website, read reviews, and always be careful when sending funds to an unknown party.
Are you struggling to repay your bills? Do you want to avoid bankruptcy? Have you heard about Debt Consolidation?
Some think that debt consolidation might be a good way to help you re-organize your life. This debt consolidation review will discuss the benefits, features and advantages of this financial relief system. Finally, the hope is that this information can help you make the best financial decision as to whether debt consolidation is for you.
Falling Behind in Payments
When you incur high debt, you will probably have signed up for a number of different loans over time. You might have a separate housing, automobile and credit card payment each month. Unfortunately, it can be difficult to keep track of the terms and conditions, interest rates and repayment dates.
The financial laws require you to not only repay your debt, but make timely payments. If you have missed a payment, then the bank will charge you a late fee. Technically, they have the right to call your entire loan in for repayment.
What is Debt Consolidation?
Of course, you probably don’t have all the money, laying around to repay your full loan, do you? If you did, you wouldn’t have taken out a loan in the first place. So, what can you do?
Debt consolidation is a debt relief program, which is an alternative to bankruptcy. Many people want to steer away from the negative consequences of bankruptcy. After bankruptcy, you might not be able to get any new loans.
The red flag of bankruptcy also stays on your credit report for years. You are forced to go before a court, the judge will learn everything about your debt problems and decide where your money will go. Bankruptcy can be very intrusive and make you feel like a failure.
How Does Debt Consolidation Work?
If you want to keep your finances private, then bankruptcy alternatives are preferable. Debt Consolidation involves your taking out a brand new loan to cover all of your disparate loans – mortgage, automobile and credit cards. This will give you one single date and interest rate for your repayment, so you can avoid late fees.
Debt Consolidation Advantages
The beauty of this debt relief program is that you can choose which loans you include and which you leave out. This is also a great way to show your creditors that you are serious about finding a debt solution. And, you can do this privately; it does not need to be done in any public court.
Another common reason for undertaking this action is to get a lower interest rate. You might have a high credit card interest rate because it is unsecured credit. When you consolidate your loans, you can get a mid-range interest rate (cars and houses are secured credit). Therefore, you might be able to save some money on the long-term costs of the loans. But beware, there will be charges for consolidating your loans.
The term capital has many meanings and definitions. Some definitions refer to capital as any non-financial asset used in the production of goods and services. Other definitions state that capital is the financial value of assets such as funds held in accounts or cash on hand. Additionally, capital in economics is tangible assets including machinery and equipment used to produce goods. Some define capital as the wealth or financial strength of an individual or company. However, when referring to capital in economics, the term refers to factors of production used to create goods that are not themselves part of the production process.
A Closer Look at Economic Capital
Economic capital is the total assets a company needs to stay solvent. A company’s capital assets are significant because organizations use capital assets to create wealth. There are several classifications of capital in economics, which many company accountants divide into two categories:
Physical Capital– This category of capital is created by a labor force and is one of the factors of production. An example of physical capital would be buildings or machinery.
Natural Capital– This category of capital assets is any natural resource used in the production process. Examples of natural capital include minerals or land.
Economic Capital Features
Certain features determine whether or not an asset is considered capital. One feature is if a company can use the asset in the production of goods or services. If it can, then the asset is a capital asset in economics and part of the factors of production.
Another feature is financial capital. Companies can liquidate this form of capital into money for trade and put that money into financial markets. The value of financial capital is based on market perceptions and what other people and other organizations are willing to pay for that capital. Other forms and features of capital include brand capital, instructional capital and human capital.
Debt/Equity Capital and Depreciation
Companies can acquire capital by assuming the debt of another company. Companies who assume debt capital expect to earn revenues through debt repayment plus interest. Equity capital includes money from the sale of stocks or bonds, or it can include any money from private investments by owners of a business. Tangible capital assets are subject to depreciation. The normal wear and tear on any asset cause the asset to lose some of its value. Some companies can use the depreciation of assets as tax deductions, which are noted on the company’s financial statements.
A lot of people misunderstand what wealth is. We tend to think of wealth only in terms of monetary units. A billionaire is defined as someone who has more than 1 billion units of his national currency in his bank. However, during a major recession, these units of currency mysteriously vanish. That is why classical economists never confuse money and wealth. Money is a measurement of a claim that can be placed on capital goods and services. Pricing your capital assets is usually done with money, but you could do it with other things as well. Older societies used gold and silver. Native American societies used chocolate beans.
Properly Measuring Capital
Capital is something that you use to create something else. An example of a capital good is a car or a factory. An example of a capital service is a bank account or a certification from an Ivy League school. If you want to understand your wealth, you have to understand how much capital you are currently holding. Many people make the mistake of heavily denominating their wealth in capital services. They put all of their earned income in the bank. The problem begins when a financial recession starts. The bank folds, or at a minimum, no longer makes it easy for you to access your claim on services that the bank can provide.
Properly Distributing Assets
It is important that wealth be distributed across multiple financial baskets. It is important to have a bank account, house, car, food, gold, land, permits, and people. If you prioritize one type of capital, it will likely let you down. Many people do not like the bother of managing their wealth properly, so they outsource that job to their creditor, which is often a bank. However, during an economic crash, the bank cares more for itself, and less for its debtors. That is why it is very important that assets be priced and valued properly. Many people like to overly focus on one type of asset. This is because it is easy. If they want to buy a new pair of shoes, they just rely on their credit card basket or their checking account basket to handle it. The danger is if the check bounces, or the credit card withdrawal is too high. Having more baskets such as cash can protect your finances from danger.
Proper capital asset pricing requires knowing what capital is. Money is not wealth. It is a claim on goods and services existing in the economy. Modern money brings with it the risk that the value of the government in the eyes of the public will suddenly be destroyed. Making sure that we diversify our portfolios can protect us from financial tragedy. A billionaire with a stack of 1 billion dollar bills is much poorer practically than a billionaire who has the right to rule a giant corporation, owns a fancy car, and has a flock of adoring admirers, with $200 million in the bank. Diversification of your portfolio creates wealth and lowers risk.
Businesses must remain solvent or else the enterprises fold. This is a simple truism that runs across all manner of different industries. Maintaining good financial footing is not easy for every company since ups and downs are unavoidable in the business world. Exploring strategies, proven strategies, to maintain good financial footing is a must. One such process many companies employ is cash flow matching, a hedging strategy designed to reduce the impact of an unpredictable market.
Stating that cash flow matching is a form of “paying bills” might be simplistic, but the description is not far removed from reality. The idea behind cash flow matching is to put money into an investment vehicle for the purpose of paying off some sort of liability in the future. Depending on where the money is invested, the process could be either a stable or a risky one.
Businesses do need to pay obligations or access cash flow for a variety of reasons. Keeping money in a reserve account helps with this process. Low-interest accounts, however, do not provide a dynamic means in which to cover obligations when future cash flow is limited. Interest-bearing accounts might be needed to address the situation.
The CD Strategy
Businesses do need insurance coverage in order to be protected from losses related to liabilities. An umbrella policy could provide millions of dollars in coverage for a business worried about dealing with a litigious public. An umbrella policy may cost $250 per year.
Investing $20,000 into a certificate of deposit (CD) at 1.2% interest will yield $240 at the end of the year. Only $10 is left to pay the balance on the insurance policy.
In essence, the interest covers the cost. The cost does not come out of the pocket of the business. This is a very basic example, but one that illustrative of how cash flow matching can be performed.
Riskier Portfolio Endeavors
More complicated cash flow matching strategies can be put into operation. Investing in stocks and mutual funds could pay out far more if the rate of return is tremendous. Obviously, stocks and mutual funds come with far greater risks that certificate of deposit or government-issued bonds. Business owners do need to think very carefully about any investment vehicle they opt to put funds into when hoping to engage in cash flow matching.
The Insurance Industry
The insurance industry presents a brilliant example of how cash flow management works. In the insurance world, premiums are paid and settlements are made. An insurance company has to take in more than it pays out in order to remain solvent. One way to boost solvency is to invest money into reliable investment vehicles. The increased value of the money aids in dealing with settlement payouts.
Speaking with a Financial Advisor
Jumping head first into a cash flow matching strategy might not be the best move. Instead, discussing the approach with a skilled financial advisor may be the better plan. Doing so could improve the chances the strategy works.
Arbitrage is a risk-free transaction that is profitable for the investor. It is the simultaneous buying and selling of a commodity in two different markets at two different prices.
The classic example is buying watermelons in Mississippi and selling them in Chicago. Watermelons are plentiful and cheap in Mississippi, and scarce and expensive in Chicago. This classic example misses the simultaneous nature of an arbitrage but captures the fundamental market dynamics that make arbitrage possible.
It is the simultaneous element in a true arbitrage that makes removes risk from the transaction. Both the purchase price and the sale price are known at the time of the transaction. This differential is exploited and realized immediately, eliminating the time value of money component of the calculation. In other words, arbitrage gives an immediate profit rather than a profit over time. This differentiates arbitrage from a risk free rate of return on bonds.
Arbitrage opportunities exist because of inefficient markets, but it is just as accurate to say that arbitrage is a mechanism that keeps markets efficient. One theoretical aspect of an efficient market is that all available information is incorporated into the price of a security on that market. If all markets were efficient, all markets would have the same price. However, price differentials between markets do exist, making arbitrage possible. An investor exploiting an arbitrage can be reasonably characterized as an agent of efficiency, communicating the pricing information between the two markets by driving the price of the security to the same point of equilibrium in both markets.
Arbitrage can exist in any market for any commodity. An individual’s life can be arbitraged in the life insurance market, for example, by the simultaneous purchase of an annuity contract (which converts a lump sum into a stream of payments guaranteed for life), and the purchase of a life insurance policy (which converts a stream of payments, the premiums, into a lump sum at the death of the insured).
In a perfectly efficient market the amount received for the lump sum from the annuity company would equal the annual payment required by the life insurance company for a death benefit equal to the initial lump sum. However, it is sometimes possible for an individual to buy an annuity for a lump sum, use only a portion of the annual proceeds to purchase a life insurance policy to replace the lump sum and pocket a positive cash flow for the remainder of their life.
Other arbitrage opportunities arise from fluctuations in currency exchange rates. The stock of a company on two different exchanges may not accurately reflect changes in the exchange rate for the underlying currencies. Investors exploiting this arbitrage bring the price of the security in both markets back in line with the new exchange rate.