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A statement of affairs is a document that is structured to provide an accurate accounting of the assets and liabilities of a debtor. This type of financial statement is often employed when an individual or business is going through a bankruptcy, and serves as the basis for the court evaluating the case, as well as providing the means for creditors to confirm or deny the accuracy of the figures contained in the document. In many judicial systems, a debtor seeking bankruptcy protection is given a specified period of time to prepare a statement of affairs and submit it to the receiver appointed by the court. Failure to do so can cause the court to declare the debtor in contempt, and set back the progress of the bankruptcy significantly.
All types of debt are included in this statement. Unsecured debt, such as credit cards, is one of the most common examples of the type of debt involved in a bankruptcy. Secured debt is also included, such as a car loan or mortgage. Businesses may have some form of preferred debt to declare as well, and can do as part of the contents of the state of affairs.
While the information on a statement of affairs is expected to be accurate, it is not necessarily a comprehensive document. Most courts do not require the debtor to provide much in the way of backup documentation for the figures presented. The main focus is to identify all creditors that the debtor wishes to include in the bankruptcy action. Because there is the possibility that some creditors will apply interest and penalties to the outstanding balances on the debtor’s accounts, most courts allow for some small amount of difference between the claims of the creditors and the figures presented in the statement of affairs.
Along with information on the current debts of the individual or business seeking bankruptcy protection, all assets must also be accounted for within the statement. This includes, but is not limited to, real estate holdings, investments that can be liquidated within a short period of time, and other types of property such as heavy machinery, vehicles, and pleasure crafts such as sailboats or power boats. Many courts provide guidelines as to what type of assets and property must be included in the statement. In addition, the attorney representing the debtor will also be well-versed in what should and should not be included for the court’s evaluation.
Once the creditors have been given time to inspect the document and submit any changes to the amount of debt owed, the court will deliberate on the bankruptcy itself. Depending on the type of bankruptcy that the debtor is seeking to obtain, and any other relevant circumstances, the court will determine which assets are to be sold and how the proceeds are to be divided between the creditors. While the process of evaluating the statement of affairs takes relatively little time for individuals, it may take a longer period for the creditors of a corporation seeking bankruptcy protection to respond, and thus pave the way for the court to render a judgment that is in keeping with the current bankruptcy laws that apply in the jurisdiction where the bankruptcy was filed.
In Chapter 11 bankruptcy, it is common for there to be disputes between the corporation in bankruptcy and creditors over the amount of claims and whether or not interest, fees and penalties are applicable.
For larger companies, thousands of claims are filed by creditors, who must then sift through those claims and determine which ones are valid, which ones are too high and which ones should be disallowed completely.
As a result, the claims objection and settlement process is usually the most time-consuming part of a Chapter 11 case.
In most instances, a company can't file its plan for payment of its debts until the claims reconciliation is complete, meaning a Chapter 11 case can, and often does, take years.
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