You’ve likely heard of bankruptcy. It is relatively common and it is usually spoken about in a negative context because people often have to use bankruptcy to get out of an unfavorable financial situation.
However, it’s important to understand that bankruptcy can provide a real solution to people who are struggling financially. Read on to learn more about bankruptcy and how it can help people with debts they cannot repay.
The Basics of Bankruptcy
Bankruptcy can provide relief for people who cannot pay their debts. It provides a fresh start by liquidating assets in order to repay debts or through the use of a repayment plan. When assets are liquidated, it means they are sold off in exchange for their cash value. Bankruptcy can also provide relief for businesses that are in financial trouble.
It’s important to keep in mind that all bankruptcy cases are handled in federal courts, and each state has at least one judicial district.
Different Types of Bankruptcies
There are several different types—or chapters—of bankruptcy that one may file. Each bankruptcy chapter has its own unique rules and regulations regarding debt elimination or repayment.
Bankruptcy for Individuals
Chapter 7 Bankruptcy
This type of bankruptcy allows individuals to be relieved of most debts, including:
- Judgments and lawsuits
- Credit card debt
- Medical and hospital bills
- Unsecured loans
- Secured loans if you need to give up the property that secures those loans
When filing under chapter 7, you should be able to keep the following assets:
- Home and burial plot equity
- Clothing, jewelry, books, musical instruments, and pets
- Health aids
- Crops and farm animals
- Household furnishings
- Work tools, books, equipment required for your work, and other “tools of the trade”
- Child support payments
- Various life insurance policies
- Various retirement accounts
- Personal injury awards and wrongful death recoveries
- Most public assistance benefits, including:
- Social security benefits
- Disability benefits
- Veterans’ benefits
- Unemployment compensation benefits
Chapter 13 Bankruptcy
Under chapter 13 bankruptcy, individuals have the opportunity to separate debts in order to help pay them off. This type of bankruptcy allows you to separate bills that are required to be paid in order to maintain a property, a family home, or even to keep a vehicle.
This chapter can be a good option for those who would rather avoid liquidating their property. Chapter 13 often allows individuals to keep their property by filing a good-faith plan of debt reorganization.
Bankruptcy for Businesses
Businesses may file for bankruptcy under chapter 7 or chapter 11.
Chapter 7 Bankruptcy
When a business files bankruptcy under this chapter, the rules are the same as they are for individuals. A trustee will take over the business’ assets and reduce them to cash. Then, the cash will be distributed to creditors in order to repay debts.
Since there is not typically a fair amount of nonexempt property in most chapter 7 cases, the business’ assets may not actually be liquidated. These cases are referred to as “no-asset cases.”
Chapter 11 Bankruptcy
This bankruptcy chapter allows businesses to reorganize their debts in order to continue operating the business. The courts allow this because the business enters a court-approved plan of reorganization.
A reorganization plan allows the business in debt to repay some of the debts and discharge others. In addition, the business may do the following:
- Discontinue crushing contracts and leases,
- Recover assets, and
- Rescale operations in order to get back to making a profit.
Certain debts may be discharged during bankruptcy, which means you are no longer legally obligated to repay these debts. A bankruptcy discharge is a permanent order forbidding your creditors from taking action to collect your debts, including:
- Legal action, and
- Communications with you, such as:
- Phone calls,
- Letters, and
- Personal contacts.
We’re Here to Help
If you have debts you cannot repay, you may have options. Don’t hesitate to reach out to our office right away to learn how we can help.