For individuals and businesses crippled by
debt, the term ‘bankruptcy’ may have come up several times as debtors seek solutions. For some, bankruptcy is necessary to find relief, but in other cases, it might be worth trying other avenues first.
Before making any sort of financial decision, it’s important to be aware of what bankruptcy is, what it entails, and the lasting impact of it. This article will answer some of the questions you may have about bankruptcy.
What Is Bankruptcy?
In order to understand the legal process of bankruptcy, it’s important to understand what it is. Bankruptcy is a complex process that involves a court proceeding in which court trustees and a judge examine an individual or business. From there, the court determines the company’s assets and liabilities.
This filing is applicable when an individual or business cannot afford to pay their bills, usually because they have limited or no income and assets left.
It’s used as a last resort to help the debtor with financial problems, and those with the least resources are given priority.
As a result of this inability, the court considers whether the individual meets the bankruptcy qualifications. Qualifications have to be met to discharge debts and release the individual or business from paying back their debts.
Bankruptcy is often a
last resort option that individuals or businesses consider when overwhelmed with debt. Whether this situation arises from poor financial choices or issues beyond the control of those impacted, it is sometimes necessary to seek relief. In one way, bankruptcy can be a second chance.
Types of Bankruptcy Filings
One bankruptcy filing is not identical to the next. Depending on the situation and the details involved,
there are several types of bankruptcy filings. These options include Chapter 7 Bankruptcy, Chapter 11 Bankruptcy, and Chapter 13 Bankruptcy. There are slightly different requirements for each.
Chapter 7 Bankruptcy
Generally, when an individual or business has little to no assets on file, they can proceed to bankruptcy filing under Chapter 7. This bankruptcy process allows the individual or business to dispose of their unsecured debts. This includes medical bills and credit card balances. If the individual has non-exempt assets, second homes, stocks, or other items, they must first liquidate their assets to repay some debts.
People who do not have any assets (except for exempt assets) typically do not have to repay their unsecured debts.
Chapter 11 Bankruptcy
Chapter 11 filings are usually for businesses. The goal of a Chapter 11 bankruptcy is to keep the company in business and become profitable again. This type of filing allows a business to create new plans, cut business costs, and rework the company in a way that increases revenue.
While the company tries to improve its business practices, it must also work on a credit card debt repayment plan. The court supervises the repayment plan to ensure compliance.
Chapter 13 Bankruptcy
For people who make too much money to file for bankruptcy under Chapter 7, they can file for Chapter 13, which is often referred to as the wage earner’s plan. This type of bankruptcy allows individuals and businesses with reliable income to create plans to repay their debts.
Typically, the timeline for this plan is a 3 to 5 year period. Because the debtors are working towards repaying all their debts, the court system allows them to keep their property. This includes property that would otherwise be non-exempt.
Less Common Bankruptcy Filings
In addition to the three most common types of bankruptcy cases, there is also a selection of uncommon filings that fit special circumstances.
- Chapter 9: This type of filing can be used by a municipal property (like cities, towns, and counties), and does not require the liquidation of assets. Instead, these parties can develop repayment plans for a period of time.
- Chapter 10: No longer in existence, this form of bankruptcy petition was designed for corporations. It has since been replaced by Chapter 11.6.
- Chapter 12: This type of bankruptcy is for family-owned farms and fisheries. Like Chapter 11 and Chapter 9, it is not a requirement for debtors to liquidate their assets to repay their debts in bankruptcy.
- Chapter 15: For bankruptcies that involve entities in several countries, there is Chapter 15 bankruptcy.
The Legal Process of Bankruptcy
Once you’ve determined that bankruptcy is right for you, it’s time to move forward with the legal process. There are many steps to this process, but they can be divided into roughly four: making sure you are legible, filing for bankruptcy, the court, and finally, confirmation of the plan (if applicable).
1. Making Sure You Are Legible
This step involves gathering all of the necessary documents to support your application. You’ll need to gather your personal information, proof of your debts, and your monthly regular income and disposable income (for example, recent statements from your bank accounts).
You can also see what the exempt property and nonexempt property you will have if you file for bankruptcy. Federal bankruptcy exemptions refer to property that cannot be taken by creditors.
You may have exemptions if you have certain types of investments, such as life insurance or retirement accounts. You may also have exemptions if you are a member of a union or have real estate or other assets that are not easily converted to cash.
You will also generally have to attend a credit counseling course, which is also called the pre-filing counseling.
This pre-filing counseling course is meant to help you figure out if bankruptcy really is your only solution or if you have alternatives to bankruptcy, such as an achievable repayment plan. The pre-filing counseling can be done through the phone, taking a short amount of time.
3. Filing for Bankruptcy
Filing bankruptcy is relatively simple; it involves filling out some common forms that can be found online or through a local law office or financial institution.
Filing your case begins with completing forms known as ‘Initiating Documents’ which include information about your assets and liabilities as well as your monthly income and expenses (the amount owed to creditors).
You will also need to specify what Chapter they are filing bankruptcy for, as well as if a bankruptcy attorney or bankruptcy lawyer is assisting you. Hiring bankruptcy lawyers will add additional fees, but they can also make the filing process much smoother.
Finally, you will usually be assigned a filing fee. The amount for this depends on the Chapter you are applying for; Chapter 7, for example, has
a fee of $338. You can pay this upfront, apply to pay it in installments, or apply for a fee waiver if you are incapable of paying it in the previous ways.
Once you have completed these documents, you can submit them to the court.
4. The Court
The next step is to submit your documents to the court. This process can be done through the mail or in person. Once you have submitted your documents, a judge will review them and determine whether or not you qualify for bankruptcy.
You will also be appointed a bankruptcy trustee, which is a representative tasked with looking after your case. In the following days after you file your case, they might send you mail asking for more financial information and statements.
If everything goes well, you will be scheduled for a hearing before a bankruptcy judge. At this hearing, you will have the opportunity to discuss the case with your attorney and if you are eligible for bankruptcy, the judge will grant your petition.
Additionally, you will also have to take a second course; specifically, the debtor education course. This education session is done for the purpose of giving you the tools and knowledge to manage your finances once your bankruptcy is over.
You will need to file the education certificate within a certain amount of time, or else they will dismiss your case.
This means that you will have to go through the whole process all over again, including paying all the initial fees once more. Therefore, you should not overlook the debtor education course.
5. Confirmation of Your Plan
If you are approved under the appropriate chapter, your attorney will notify all creditors that they must accept your plan (which may involve paying less than what they would have been owed).
The result is that your creditor will have to agree to make timely payments on your debts over time while being paid less than what they would have been owed in full. By now, you will have reached a debt settlement.
What You Need to Know About Bankruptcy: The Pros and Cons
While declaring bankruptcy is sometimes necessary, it is not a 100% positive situation. There is a reason why this step is often a last resort. Bankruptcy can serve the purpose of helping debtors find relief from the types of debts they have no possibility of paying. Filing for bankruptcy can also have negative impacts.
It can lower an individual’s score in their credit report and invite a lot of financial hardship in the long run. Someone who has declared bankruptcy might struggle to get a loan, rent an apartment, obtain a credit card, or buy a home.
The filing will stay on one’s credit report for up to 10 years and it’s important to understand that recovering may be difficult.
After learning what you need to know about bankruptcy, consult with a financial professional who can advise you further on a payment plan or a credit card debt management plan.
You can find a reliable professional by looking into credit counseling agencies. By counseling with a professional, you can make the best decision possible for your financial future and avoid financial distress.
