When debts are greater than the inflow of money, a person or entity can file for bankruptcy as he is unable to repay his debts. Under such circumstances, the creditor has the right to approach the court for his dues. When this happens, the court will verify the finances of the debtor and if it turns out that the debtor is unable to pay, the court will ask the person if he wants to be declared bankrupt. If the person says no, the court issues the bankruptcy court option agreement, wherein the debtor is protected from legal action by the creditor. The debtor can retain his non-exempt assets while the creditor accepts the reorganization and repayment plan highlighted in the agreement.
When Do You Need Bankruptcy Court Option Agreement
Bankruptcy court option agreement can become a necessity if the debtor does not want to face home foreclosure or lose assets, like automobiles, that they may have been used as collateral to secure the loan. It is also used when companies do not want their assets to be liquidated. The agreement allows the business to function normally while sticking to a compensation plan to repay the creditor.
Purpose of Bankruptcy Court Option Agreement
The purpose of the bankruptcy court option agreement is to protect the interests of both the debtor and the creditor. It allows the debtor to retain their assets without liquidation and at the same time, the creditor is at peace knowing that he/she will be able to recover the dues based on the agreed terms and conditions mentioned in the agreement.
Bankruptcy court option agreement can become a necessity if the debtor does not want to face home foreclosure or lose assets, like automobiles, that they may have used as collateral to secure the loan. It is also used when companies do not want their assets to be liquidated. The agreement allows the business to function normally while sticking to a compensation plan to repay the creditor.
Inclusions in the Bankruptcy Court Option Agreement
Since the bankruptcy court option agreement is a binding legal document, it will necessarily have certain inclusions. Some of the inclusions in the agreement are as follows:
- Names of the debtor and creditor(s).
- Addresses of the debtor and creditor(s).
- The amount the debtor owes.
- The assets categorized as exempt and non-exempt.
- The non-exempt assets that the debtor will be retaining.
- The rehabilitation and reorganization of the debt.
- The number of years that the debtor has to compensate for the creditor.
- The penalty if the debtor fails to adhere to the contract.
How to Draft Bankruptcy Court Option Agreement
The steps you need to follow while drafting this agreement are:
- Complete the official paperwork mandated by the court.
- Opt for a pre-filing credit counseling course (for individuals).
- The court evaluates the paperwork to ascertain the true status of the finances, liabilities, and assets.
- The court appoints a trustee.
- Court dispatches a notice to the debtor and creditor. These notices contain general information on the bankruptcy, date of the meeting of creditors, the deadline for the creditors to file their claim, debtor’s repayment plan, and date of the confirmation hearing.
- Meet creditors to finalize the repayment plan.
- Inform the trustee.
- Attend confirmation hearing to inform the court about retaining non-exempt assets.
- The court issues the bankruptcy court option agreement which is signed by the debtor and creditor(s).
Pros and Cons of Bankruptcy Court Option Agreement
The advantages of the agreement make the agreement worthwhile. Here are a few benefits that you should know:
- The debtor gets to retain ownership of exempt and non-exempt assets.
- Protects the interest of the debtor and the creditor.
- If the debtor is an entity, it can continue functioning.
- Creates an organized plan for compensation.
Now that you know of the advantages, it is time to look at the disadvantages. Here are some of them:
- The debtor would have to repay the loans in entirety.
- The debtor has to stay current on all loan payments.
- Has an adverse effect on the debtor’s credit score.
- The onus lies on the debtor to make the agreement work.
Types of Bankruptcy Court Option Agreement
There are primarily two types of bankruptcy court option agreements. They are as follows:
- The first type of bankruptcy court option agreement is for individuals who want to retain their home or other collateral used to procure the loan.
- The second type of agreement is for entities, where they can keep their assets and continue operations without the bankruptcy and default on loans affecting their business.
Key Terms/Clauses in Bankruptcy Court Option Agreement
The key terms of the agreement are as follows:
- Disclosure Statement: A written document by the debtor that details the income, assets, and liabilities for helping creditors and the court evaluate the repayment plan.
- Bankruptcy Petition: A formal petition required to protect the debtor under federal bankruptcy laws.
- Bankruptcy Trustee: A private individual or an entity appointed by the court to represent the interests of the debtor and creditor(s).
What Happens When You Violate Bankruptcy Court Option Agreement
If you violate the terms and conditions of this agreement, the matter shall go back to the court, and you can lose non-exempt assets.
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