Bankruptcy is a legal procedure designed to protect both debtors and creditors.
If you are considering declaring personal or business bankruptcy, or if you are owed money by a bankrupt person or business, you need to understand bankruptcy rules.
Bankruptcy is governed by the US Bankruptcy Code. Bankruptcy cases are administered by special federal bankruptcy courts that exist in every judicial district nationwide.
Chapter 7 Liquidation
A bankruptcy filed under Chapter 7 is called a “liquidation bankruptcy,” and can apply to individuals or businesses. If you file a Chapter 7 case, the goal of the procedure will be to liquidate (sell for cash) your bankrupt estate. Some of your assets may be exempt from the bankrupt estate and they will not be liquidated. For the assets that are part of the bankrupt estate (known as “nonexempt” assets), a trustee will be appointed to oversee the liquidation process. Once the assets have been liquidated, the proceeds from the sale will be distributed to creditors according to prescribed rules. Many Chapter 7 cases involve only exempt assets, so that creditors are not able to recover any money from the bankrupt estate. After you have completed the Chapter 7 process, most or all of your debts will be discharged and you will be given a fresh start. You can file Chapter 7 bankruptcy only once every six years.
Chapter 11 Reorganization
A bankruptcy filed under Chapter 11 generally involves the reorganization of a business or its orderly liquidation. If you file a Chapter 11 case, your business will be allowed to continue to operate under the supervision and guidance of a trustee or administrator, thereby generating income that may be used to pay creditors. This has become a common filing for businesses, and creditors should become familiar with the rules governing such reorganizations.
Chapter 13 Repayment Plans for Individuals
Chapter 13 applies to individuals who have regular income. If you file a Chapter 13 bankruptcy, you will follow an approved plan to repay all or a portion of the debt over an extended period of time. Generally, to file under Chapter 13, you must have Regular income; Secured debts of less than $750,000; and Unsecured debts of less than $250,000. You will be asked to provide a budget and a proposed plan of repayment covering a period of time (usually three years) to the Bankruptcy Court. The plan must be approved by the bankruptcy judge. When the plan is completed, the Court will discharge your debts. There is no limit to the number of times you can file under Chapter 13, so long as pre-established percentages of debt have been repaid.
Bankruptcy Discharges Your Debts
Once a bankruptcy proceeding ends, you will be “discharged” from your debts – that is, you will no longer be liable for any outstanding debts. “Discharge” occurs when the Bankruptcy Court enters a discharge order in a Chapter 7 case, or when you have paid your creditors according to a plan in a Chapter 11 or Chapter 13 case. You can then start over with a clean financial slate. However, the record of your bankruptcy will remain on your credit record for up to 10 years.
Bankruptcy may be the best, or only, solution for extreme financial hardship. You should use bankruptcy only as a last resort, however, since it carries long-lasting consequences. Be sure to consult a financial expert before resorting to bankruptcy as a means of solving your economic troubles.
Your Credit Will Be Affected by Bankruptcy
Your credit status will be affected by filing bankruptcy. If your credit is perfect, bankruptcy will have a negative effect on your credit. If your credit is substantially impaired, now or in the near future, filing bankruptcy may not affect your credit status negatively, and it may your improve your credit status because, after filing bankruptcy you are debt-free, making your ability to repay any new credit better after bankruptcy than before, simply because you have no other debts to pay after declaring bankruptcy.