Legal News

07-Sep-2022

What Is Bankruptcy and How Can It Help You?

Bankruptcy is a legal process that individuals, businesses, and trusts can use to eliminate or reduce their financial obligations when they no longer have the ability to pay what they owe. Bankruptcy is governed by federal law, and the process and rules are the same throughout the country. If you are considering bankruptcy, you might have questions about how the process works and what happens if you choose this route. What are the steps in bankruptcy? How do you select a bankruptcy attorney? What happens to your assets? What about your debts?

A bankruptcy impacts your credit rating for some time after you file, and there are consequences, so it’s not something that should be taken lightly. Bankruptcy is not the same thing as a settlement or negotiation with creditors. Bankruptcy is a legal process that puts an end to collection activities, erases debt, and allows you to start with a clean slate. It’s important to understand that bankruptcy is a public record and will stay on your credit report for up to 10 years. However, it’s the quickest and most certain way to get a fresh start when you’re up against unmanageable debt. In addition, it’s not the same thing as debt settlement or debt mediation. Several different types of bankruptcy may help you if you can no longer afford to pay your debts. Each comes with its benefits and drawbacks. Here’s what you need to know about each type:

1. Chapter 7 Consumer Bankruptcy

This is the most common type of bankruptcy, and it’s available to individuals, couples, and families, as well as single people who’ve lived in their homes for at least two years. You may also be able to file Chapter 7 if you’re married and living with a spouse who is also in debt. This type of bankruptcy is meant for debtors who don’t have a lot of assets and don’t have enough income to repay their debts. Filing Chapter 7 means that a trustee will go through your assets to determine if they are exempt from collection by creditors. If they are, they will not be taken by the trustee. If they’re not exempt, they will be sold, and the proceeds will go to your creditors. Chapter 7 is great if you have a lot of debt but few assets.

2. Chapter 13 Consumer Bankruptcy

This type of bankruptcy is designed for individuals who have become overwhelmed with debt. If you’re living on a tight budget and have accrued a lot of debt, Chapter 13 might not be right for you. Individuals who qualify for this type of bankruptcy must have enough income to repay a portion of their debt through a monthly payment plan over three to five years. These payments are based on your income and other debt. If you qualify, a Chapter 13 bankruptcy allows you to repay your debts over time without having your assets seized. In this scenario, you are responsible for paying back the money you owe, so it’s very important that you keep up with your payments. Chapter 13 is great if you have a lot of debt and a steady income.

3. Chapter 11 Business Bankruptcy

If you are the owner of a business that has accrued a lot of debt, you may be able to file Chapter 11 as a form of bankruptcy. Chapter 11 is also used by public utilities and railroads, as well as large companies that have issued securities. Chapter 11 is designed to restructure the debts of the business and allow the business to continue operating. However, Chapter 11 also comes with certain restrictions, so make sure you understand that before you file. Chapter 11 is great if you own a business that is experiencing financial problems.

4. Chapter 12 Corporate Bankruptcy

This type of bankruptcy is used by corporations with debts and obligations. It provides a fresh start and a way to discharge or reduce debts. This type of bankruptcy is usually used by larger companies that have creditors and significant debt obligations. When considering whether to file for corporate bankruptcy, a corporation should weigh the benefits of debt reduction against the costs and consequences of bankruptcy. It doesn’t usually apply to small businesses or individuals. Chapter 12 is designed to help a corporation continue operating while it restructures its debts. Chapter 12 is great if you own a corporation that is experiencing financial problems.

5. Chapter 15 Rehabilitation and restructuring

A Chapter 15 bankruptcy could be an option if you’re an individual or a business that has a lot of debt, but you’re not in a position to repay it. The main advantage of this type of bankruptcy is that it stops collection activity on your debts, including lawsuits and garnished wages, and puts those debts under the protection of the bankruptcy court. A majority of Chapter 15 debtors are individuals who have a lot of medical debt but aren’t in a financial position to repay it. You might also be eligible for Chapter 15 bankruptcy if you have debts that are primarily in another country. In this type of bankruptcy, you’ll need to propose a repayment plan. If the court approves it, your creditors have to accept it. This allows you to restructure your debt, so you don’t have to repay it immediately. Chapter 15 is great if you have a lot of debt but don’t have the money to repay it. However, it does come with some drawbacks. Namely, it’s a long process that could take several years to complete.

6. Corporate Restructuring

This type of bankruptcy is used by corporations that have a lot of debt but are solvent. It does not apply to insolvent corporations. To file for corporate bankruptcy, the company must be insolvent, which means that it has more liabilities than assets. Once the bankruptcy is filed, the company’s assets are frozen and put into a special account. The creditors cannot touch the assets but can try to collect from the frozen account. After the bankruptcy is filed, the company must submit a plan for how it will pay back the creditors. The plan must be accepted by a majority of the creditors. After the plan is accepted, corporate bankruptcy is lifted, and the assets are released from the frozen account to be used to pay back the creditors. In the corporate restructuring, the corporation distributes all or a portion of its assets to its creditors. It’s a way for corporations with a lot of debts to get rid of those debts without filing for Chapter 11.

Conclusion

Whatever type of bankruptcy you choose, it’s important to understand the implications and to plan accordingly. You can consult a bankruptcy lawyer to assist you with the process and answer any questions you may have. Even if you don’t ultimately decide to file for bankruptcy, it can be a helpful exercise to organize your financial situation and think through your options. Stay informed and stay updated on the latest changes in laws and regulations to ensure that you’re protected at all times. A bankruptcy will have an impact on your credit score, but it depends on which type of bankruptcy you file. Bankruptcy is not the right solution for everyone. If you can pay your debts, you should try to repay them. If you can’t, there are other options available to you.