Ins and Outs of Bankruptcy


Whether you are an individual who has become overwhelmed with personal debt, or a business owner unable to surpass the financial challenges imposed by the recession, filing for bankruptcy may be an option for you. However, filing for bankruptcy can be a daunting process that nearly always requires professional legal assistance to achieve the best possible outcome. Additionally, depending upon your circumstances, filing for bankruptcy may bring about significant consequences to be taken into consideration, such as a long term impact on your credit rating. While bankruptcy laws are designed to create order out of financial chaos, they are complex and must be carefully navigated.


What is bankruptcy?


Bankruptcy is a process exclusively implemented through federal courts to assist both individuals and businesses who have become overwhelmed with debt to start over. In some situations this process can result in debts being forgiven, but this is not always the case and it is important to know in advance that obligations such as child support or debts to the Internal Revenue Service will not be discharged. Normally, bankruptcy courts will resolve your financial burdens either by requiring that your assets be liquidated (within reason) to generate funds to satisfy creditors or by designing a repayment plan.  For businesses, bankruptcy proceedings may also include a reorganization plan.

The initial relief for many debtors is that the mere filing of the bankruptcy petition will issue one or more “stays” meaning that all actions against the debtor by creditors for the purposes of collecting debt must cease – this includes ending everything from harassing telephone calls to lawsuits and wage garnishment. Another strong advantage of bankruptcy, according to the National Association of Consumer Bankruptcy Attorneys, is that it offers one of the only ways to protect property from being seized by unsecured creditors, and it may provide protection for one’s home, car or other significant possessions. However, in return, along with a series of legal forms that must be correctly completed and submitted, the debtor is required to generate and organize a significant amount of financial records including all assets, income, liabilities, as well as all information pertaining to creditors including the amounts owed.

There are three main types of bankruptcy (referred to as “chapters” based on where they are located and defined in Bankruptcy Code): Chapter 7, Chapter 11, and Chapter 13. Each type addresses a different type of bankruptcy.


Chapter 7


Chapter 7 of the Bankruptcy Code provides relief to individuals, partnerships, corporations, or other business entities. Generally, Chapter 7 is considered to be among the most straightforward of bankruptcy processes – the debtor relinquishes assets and the court determines an orderly distribution to creditors and/or discharges debt.


Chapter 11


Chapter 11, in contrast to Chapter 7, provides relief through reorganization and is primarily used by businesses, including corporations and sole proprietorships, although technically it is available to individuals as well.


Chapter 13


Another type of “reorganization bankruptcy”, Chapter 13 is appropriate for those individuals solvent enough to make arrangements to pay off debt within three to five years and do not want to be subject to having to liquidate properties they would prefer to keep.


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