Bankruptcy is the process by which a person legally declaring himself or herself incapable of paying outstanding debts. Depending on the type of bankruptcy filing filed, one meets with a judge to determine a payment plan, or has a legal bankruptcy discharge most, if not all, debt. Companies can also declare bankruptcy, which means either the company will close or the company will continue to operate with lower payments to debtors. Each country has its own bankruptcy designations, but this explanation will focus on the most common types of bankruptcy in the United States.
Chapter 7 Bankruptcy
Bankruptcy for the individual or married or cohabiting couple comes in three forms, called chapters. Chapter 7 Bankruptcy is the most common form filed by spouses or individuals. Chapter 12 bankruptcy is limited to people who are family farmers or fishermen. Individuals or married couples may also file Chapter 13 bankruptcy, but this is rare.
For companies, the two common forms of bankruptcy utilized Chapter 7 and Chapter 11 are less frequent, an individual or company file under Chapter 15 bankruptcy, involving the clearing of international debt. If an agency for the state, like a city, has to declare bankruptcy, the file chapter 9, which is also called municipal bankruptcy.
Chapter 7 bankruptcy tends to be used by either individuals or companies seeking a total clean board. A company that files chapter 7 bankruptcy tends to close their business as a result. For the individual, Chapter 7 bankruptcy means that the courts declare an inability to pay debts, and almost all debts are then canceled. Some federal debt, such as student loans, is unaffected by bankruptcy.
Filing Chapter 7
Generally, one must be able to prove that one’s income is insufficient to cover debt. One person filing Chapter 7 risks losing the most assets with this type of bankruptcy. You will not lose a primary vehicle or stay under this form of bankruptcy unless the person has an auto loan and cannot make payments on the vehicle or a mortgage loan for which he or she cannot pay.
All assets must be declared on submission of Chapter 7. Other assets such as holiday homes, collectors’ items and extra vehicles are liquidated to pay off debts. Most people who file chapter 7 bankruptcy do so because they have very little to lose. When a judge approves bankruptcy filing, virtually all debts they owe to credit card companies and doctors or hospitals are cleared and the person gets a clean billboard.
Chapter 13 bankruptcy
Chapter 13 bankruptcy is filed by individuals who own a large portion of property or assets, but find that their income cannot cover the exorbitant payments on receivables. In this form, the debt is restructured and, in some cases, reduced so that people retain their assets but have reasonable payments that they can make to debtors. Generally, court-ordered payments must be made on time and regularly to avoid having assets seized.
Companies submit a similar form of bankruptcy called Chapter 11. Some or some of the company’s debt may be deleted and payment plans restructured. Chapter 11 bankruptcy aims to reschedule debt so that the company can continue operations.
All forms of bankruptcy are a costly means of achieving debt relief. Both individuals and businesses suffer from a reduction in their credit score after a bankruptcy. Individual bankruptcy stays on one’s credit report for 10 years, which can make getting approved for new cars, homes, or credit cards expensive and difficult.