{"id":148435,"date":"2023-07-15T17:38:56","date_gmt":"2023-07-15T17:38:56","guid":{"rendered":"https:\/\/businessyield.com\/?p=148435"},"modified":"2023-07-15T17:38:58","modified_gmt":"2023-07-15T17:38:58","slug":"filing-for-bankruptcy-what-is-it-types-and-how-it-works","status":"publish","type":"post","link":"https:\/\/businessyield.com\/bs-personal-finance\/filing-for-bankruptcy-what-is-it-types-and-how-it-works\/","title":{"rendered":"Filing for Bankruptcy: What Is It, Types and How It Works","gt_translate_keys":[{"key":"rendered","format":"text"}]},"content":{"rendered":"

Filing for bankruptcy provides a legal means of escape from overwhelming debt. Individuals and corporations alike frequently seek discharge from financial obligations through the legal system. The request is typically approved. Filing for bankruptcy allows you to either discharge your debts or reorganize them into manageable payments. However, the debtor typically initiates a bankruptcy case by submitting a petition to the bankruptcy court. An individual, a married couple, a company, or another legal body can all file a petition. In this article, we will discuss the pros and cons of filing for bankruptcy and what filing bankruptcy actually means.<\/p>

Let’s get a strong grasp on what bankruptcy is before we dive into filing for it.<\/p>

What is Bankruptcy?<\/strong><\/span><\/h2>

Bankruptcy is a legal action that is started when a person or business is unable to satisfy outstanding debts or commitments.  It aims to assist individuals and organizations in eliminating all or a portion of their debt or repaying a portion of what they owe.<\/p>

However, it is more beneficial to view bankruptcy as a legal mechanism available when you or your firm are unable to meet financial obligations. Bankruptcy is one of the least understood debt relief solutions because of its complexity and stigma.<\/p>

Furthermore, in a bankruptcy case, the assets and debts of a person, partnership, or company that has come to the conclusion that it cannot pay its bills are evaluated by a court-appointed trustee and judge.<\/p>

Bankruptcy laws allow people and corporations to start over after financial hardship, but they have certain criteria.<\/p>

Section 341 of the Bankruptcy Code requires debtors to attend a creditor’s meeting and submit specific financial information to the bankruptcy court and trustee, as well as complete more than 20 bankruptcy forms.<\/p>

How Bankruptcy Works<\/strong><\/span><\/h2>

By canceling out debts that can’t be repaid, bankruptcy gives a person or company a fresh financial slate. Meanwhile, creditors have a chance to recoup some of their losses through the sale of whatever assets are available.<\/p>

Bankruptcy, in principle, helps the economy as a whole by giving individuals and businesses a second chance to rebuild their credit. This method can also aid creditors in recouping some of their losses.<\/p>

In the United States, the federal government handles all bankruptcies. A debtor’s ability to file for bankruptcy and the debtor’s entitlement to a discharge are two of the many issues that a bankruptcy judge might decide.<\/p>

A trustee, an officer designated by the United States Trustee Program of the Department of Justice to represent the debtor’s estate in the proceeding, is often responsible for administering bankruptcy cases. Unless the creditor raises an issue, the debtor and the judge rarely interact. When a debtor’s bankruptcy case has been resolved, they are released from their debts. Related Article HOW BANKRUPTCIES WORK (All You Should Know)<\/a><\/p>

Important Bankruptcy Terms<\/strong><\/span><\/h2>

You will need to be familiar with several bankruptcy-specific legal phrases if you plan to participate in the bankruptcy process. Some of the most typical and crucial ones are as follows:<\/p>

#1. Bankruptcy Trustee<\/span><\/h3>

The bankruptcy trustee is the individual or company authorized to represent the interests of the creditors by the bankruptcy court. In Chapter 7 bankruptcies, he or she evaluates the debtor’s request, sells off any assets, and gives the money to the creditors. When a debtor files for Chapter 13 bankruptcy protection, the trustee is responsible for managing the repayment plan, collecting payments from the debtor, and distributing those funds to the creditors.<\/p>

#2. Credit Counseling<\/span><\/h3>

You will be required to attend either an individual session or a group session with a non-profit agency that provides budget and credit counseling before you are eligible for filing bankruptcy. After you’ve submitted your paperwork, you’ll then be needed to finish a course on how to properly handle your personal finances in order to have the bankruptcy wiped. Both of these prerequisites could be exempt from fulfillment in particular scenarios.<\/p>

#3. Exempt Property<\/span><\/h3>

Even though filing for either Chapter 7 or Chapter 13 bankruptcy could require you to sell assets to help repay creditors, there are certain kinds of property that could be exempt from this requirement. In general, things like work tools, a personal automobile, or equity in a primary property may be excused from a debtor’s obligation to give them up, depending on the state legislation that governs the situation.<\/p>

#4. Means Test<\/span><\/h3>

If you wish to apply for Chapter 7 bankruptcy under the Bankruptcy Code, you have to prove that you truly cannot pay back your debts. The rule is there to prevent people from abusing the bankruptcy system. The test factors in things like regular income, assets, expenses, and unsecured debt. Depending on the results of the means test, a Chapter 7 bankruptcy case may be dismissed or changed to a Chapter 13 bankruptcy.<\/p>

#5. Reaffirmed Account<\/span><\/h3>

Debts that may otherwise be forgiven in a Chapter 7 bankruptcy filing can sometimes be kept current with the debtor’s consent. If the debtor wants to maintain an asset (such as a car) that would be repossessed as part of the bankruptcy process, he or she can reaffirm the account and therefore agree to pay the obligation.<\/p>

#6. Secured Debt<\/span><\/h3>

Recoverable debt is debt secured by an asset that can be taken back if necessary. In the case of a mortgage, the collateral is the house itself, and in the case of an auto loan, the collateral is the vehicle. If you fail to repay a secured loan, your creditors may attempt to repossess the collateral.<\/p>

#7. Liquidation<\/span><\/h3>

The selling of a debtor’s property that is not exempt from being sold. After being converted into a “liquid” form (cash) through the sale, the assets are subsequently distributed among the debtors.<\/p>

Who Declares Bankruptcy?<\/strong><\/span><\/h2>

Bankruptcy is filed by people at a much higher rate than businesses, and this includes not only the wealthy who are trying to recoup losses from poor investment choices.<\/p>

In 2022, businesses were responsible for only 13.4% of the total bankruptcy filings (387,721). Chapter 7 and Chapter 13 bankruptcy filers often have median annual salaries between $30,000 and $40,000.<\/p>

It makes sense that individuals would file for bankruptcy as the great majority of bankruptcies are filed by individuals who have insufficient income to pay off large debts such as mortgages, credit card balances, automobile loans, or student loans.<\/p>

Some people utilize bankruptcy as a long-term financial strategy to rearrange their debt. Arrested mortgage payments and back taxes are two examples.<\/p>

People successfully utilize bankruptcy to block or postpone collection actions including foreclosure, repossession, and wage garnishment, despite the fact that it negatively impacts their credit and future financial options.<\/p>

What Are the Consequences of Bankruptcy?<\/strong><\/span><\/h2>

The most obvious effect of declaring bankruptcy is the loss of possessions. As was previously said, in either chapter of bankruptcy, you may be required to liquidate some or all of your assets to satisfy your creditors. For some people, filing for bankruptcy means giving away their home, car, jewels, and antique furniture.<\/p>

It’s possible that your bankruptcy will have an effect on the finances of other people as well. If your parents co-signed a car loan for you, for instance, they may be held liable for a portion of the loan’s remaining balance even after you declare bankruptcy.<\/p>

Bankruptcy, lastly, can lower your credit score. Having bankruptcy on your credit report will have a detrimental impact on your ability to borrow money in the future. Creditors may be hesitant to issue credit to you if they see a bankruptcy on your credit report, or they may offer you less favorable terms and interest rates if they do extend credit to you.<\/p>

Furthermore, filing for bankruptcy can have a lasting impact on your credit score, perhaps for as long as ten years. Accounts that have been discharged will have their status changed to indicate that they have been discharged, and this change will be reflected in your credit report as well. In addition, a lower credit score can be the result of having negative information on your credit report.<\/p>

What Does Filing for Bankruptcy Mean<\/strong><\/span><\/h2>

Filing for bankruptcy provides immediate debt relief due to the automatic stay. That’s the statute that prevents creditors from contacting you after you file for bankruptcy. Additionally, it immediately halts pay garnishment.<\/p>

It’s important to weigh the pros and cons of bankruptcy before filing. Many people have benefited from bankruptcy’s ability to discharge debt, but you must evaluate your own situation to see if this is the best course of action.<\/p>

Alimony, child support, and recent taxes aren’t dischargeable in bankruptcy. Your bankruptcy will not shield your co-signers from liability.<\/p>

A bankruptcy filing can’t be used to eliminate all debts, especially student loans. If you have federal student loans and meet the requirements, you may be able to get rid of your loan payments altogether in a Chapter 7 bankruptcy. It is possible to have private student loans let go, but doing so is usually sufficiently complex to need legal counsel.<\/p>

Types of Bankruptcy Filing?<\/strong><\/span><\/h2>

In the United States, bankruptcy petitions are filed under one of several chapters of the Bankruptcy Code. Liquidation of assets is the focus of Chapter 7 bankruptcy, while reorganization is the focus of Chapter 11 and debt payback is the focus of Chapter 13, which can feature lower debt covenants or individualized payment arrangements.<\/p>

#1. Chapter 7 <\/span><\/h3>

The most prevalent type of personal bankruptcy filing is Chapter 7, which calls for the debtor to hand over all of their non-exempt property to a trustee. Items such as furniture, clothing, and appliances are examples of personal property that are not subject to taxation.<\/p>

The proceeds from the bankruptcy are distributed to the creditors in exchange for the cancellation of the remaining debt. Even if a debt is written off, the creditor holding the collateral (in this case, the car) can still exercise their right to repossess the vehicle.<\/p>

A “means test,” which considers your income and debts, must be passed in order to qualify for this form of bankruptcy protection. Since the means test requirements are different in each state, it’s best to get legal advice from someone familiar with the laws in your area. Further, a person who does not meet the requirements for Chapter 7 bankruptcy may be bound to file under Chapter 13.<\/p>

#2. Chapter 11 Bankruptcy<\/span><\/h3>

In Chapter 11 bankruptcy filing, companies can restructure in order to continue operations. When a business files for Chapter 11 bankruptcy, it gets a fresh start to focus on profitability by identifying and implementing cost savings and revenue growth opportunities. Common stockholders will be paid after any preferred stockholders, if any, are paid.3<\/p>

However, a Chapter 11 filing cleaning firm, for instance, might consider raising prices somewhat and adding new services in order to turn a profit. While the company is working on a plan to repay its debts under the supervision of the court, it can keep operating normally under Chapter 11 bankruptcy. Only people in extraordinary situations should consider filing for Chapter 11 bankruptcy.<\/p>

#3. Chapter 13 Bankruptcy<\/span><\/h3>

Chapter 13, often known as a wage earner’s plan, is an option for people who make too much money to apply for Chapter 7 bankruptcy. Individuals and enterprises with stable cash flow can use this to their advantage by working up manageable plans for paying down their debts.<\/p>

Repayment plans typically consist of monthly payments spread out over three to five years. The debtors have the opportunity to keep all of their property, even nonexempt property, as long as they reimburse their creditors.<\/p>

While Chapters 7, 11, and 13 constitute the vast majority of bankruptcies, there are a few others:<\/p>