Bankruptcy protection can cancel most debts and sell assets or create a payment plan. Individuals can file for Chapter Seven or Chapter 13, while businesses can file for Chapter Seven or Chapter 11. It is recommended to hire a bankruptcy attorney due to the complexity of bankruptcy laws.
When a person or business is unable to make payments to creditors to pay off its debts, it may file for bankruptcy protection under the bankruptcy laws of the United States. For an individual, bankruptcy protection may involve the cancellation of most debts, along with the sale of some of their assets, or a structured plan to pay off debts that are owed. For a business, bankruptcy protection can provide full or partial relief from debts and contracts, assuming the business remains in business, or the business can go out of business and sell its assets to pay off debts.
There are two types of bankruptcy protection commonly used by individuals: Chapter Seven and Chapter 13, where “chapter” refers to the chapter of the bankruptcy code that describes each. In Chapter Seven, also called “straight bankruptcy” or “liquidation,” a trustee is appointed to control the individual’s assets. The trustee then liquidates, or sells, the assets, then turns the money over to the creditors to pay the debts, to the extent that this is possible. However, the individual is allowed to keep some personal property, depending on the laws of the state in which he lives.
Chapter 13, also called “earners’ bankruptcy,” allows an individual to propose a plan to pay off their debts without interest over a period of three to five years, although the individual’s repayment plan is subject to court approval. Whereas in Chapter 13, an individual is protected from creditors collecting debts or seizing assets to pay debts, and creditors are required to abide by the terms of the approved repayment plan. Both types of personal bankruptcy make it very difficult for a person to obtain credit for a period of seven to ten years after seeking bankruptcy protection.
Businesses can also seek bankruptcy protection under Chapter Seven, but also under Chapter 11, which is a reorganization, rather than a liquidation of assets. It can take months or years for a business to emerge from this type of bankruptcy. Similar to Chapter 13, a business in Chapter 11 can propose a plan to repay its debts within a certain period of time, after which it is up to creditors to come up with a plan. If the business has shares that are traded on a public stock exchange, then the shares may no longer be publicly traded once bankruptcy protection is sought. In some cases, this causes the value of the company’s shares to drop to zero.
For businesses, and especially individuals considering bankruptcy, hiring a bankruptcy attorney is highly recommended, due to the complexity of bankruptcy laws, which also vary slightly from state to state.
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