Bankruptcy is a legal process where a person or business declares themselves unable to pay outstanding debts. The most common types in the US are Chapter 7 for individuals and Chapter 11 for businesses. Bankruptcy is an expensive means of getting debt relief and can result in a reduction in credit scores.
Bankruptcy is the process in which a person legally declares himself or his business unable to pay outstanding debts. Depending on the type filed, one meets with a judge to determine a payment schedule, or file for legal bankruptcy, on most, if not all, debts. Businesses can also file for bankruptcy, which means the business will go out of business or the business will continue to operate with reduced payments to debtors. Each country has its own designations, but this explanation will focus on the most common types in the United States.
Bankruptcy for the individual or married or married couple comes in three forms, called “Chapters.” Chapter 7 is the most common form filed by spouses or individuals. Chapter 12 is restricted to people who are family farmers or fishermen. Individuals or married couples can also file Chapter 13, but this is rare.
For businesses, the two common forms of bankruptcy used are Chapter 7 and Chapter 11. Less commonly, an individual or business may file under Chapter 15, which involves the settlement of international debts. If a state agency, such as a city, must file for bankruptcy, they file Chapter 9, which is also called municipal bankruptcy.
Chapter 7 tends to be used by individuals or businesses who want a totally clean slate. As a result, a business that files Chapter 7 tends to close its doors. For the individual, this type means that the courts declare that one cannot pay the debts incurred, and almost all debts are cancelled. Certain federal debts, such as student loans, are not affected by filing for bankruptcy.
In general, one must be able to show that the income is not enough to cover the debts. A person who files Chapter 7 risks losing most assets with this type of bankruptcy. A vehicle or primary residence will not be lost under this form, unless the person has an auto loan and cannot make payments on the vehicle, or a home loan, which they cannot afford.
All assets must be reported when filing Chapter 7. Other assets, such as second homes, collectibles, and additional vehicles, are liquidated to pay off debts. Most who file Chapter 7 do so because they have very little left to lose. Once a judge approves the filing, virtually all debts, such as those owed to credit card companies and to doctors or hospitals, are erased and the person receives a clean list.
Chapter 13 bankruptcy is filed by people who own a large amount of property or assets, but find that their income cannot cover the exorbitant payments on debts owed. In this way, the debt is restructured and, in some cases, reduced so that people keep their assets but have reasonable payments that they can make to debtors. In general, court-ordered payments must be made on time and regularly to avoid assets being seized.
Businesses file a similar form called Chapter 11. Part or part of the business’s debt can be discharged and payment plans restructured. Chapter 11 is for the purpose of reorganizing the debt so that the business can continue to operate.
All forms are an expensive means of getting debt relief. Both individuals and businesses experience a reduction in their credit scores after a bankruptcy. Individual bankruptcy stays on one’s credit report for 10 years, which can make getting approved for new cars, houses, or credit cards expensive and difficult.
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