The decision of whether or not to file for bankruptcy can be quite difficult for most people. However, it can be even harder due to how confusing bankruptcy law is. To help, here is some information to give you a stronger understanding of bankruptcy laws.
What Is Bankruptcy?
Simply put, bankruptcy is a legal state that a person or business enters in which that person or business is determined to no longer have the ability to pay off debts without the assistance of a court. The purpose of bankruptcy, however, is not to simply facilitate the payment of those debts. Often, that is at least part of the process. However, the ultimate goal of bankruptcy for individuals is to allow a person to enter a state in which that person is completely free of debt. In this sense, bankruptcy can be a way to give a person a completely fresh start.
There are many different forms of bankruptcy, and all of these different forms are broken up into different “chapters” in the law. For example, the forms of bankruptcy related to businesses are Chapters 7 and 11. Chapter 7 can also be used by individuals and involves a liquidation of assets. For businesses, this usually implies that the business will sell off all of its assets to pay off creditors before that business shuts down for good. On the other hand, Chapter 11 involves a reorganization of that business so it can continue operating after the bankruptcy has finished.
There are also many other forms of bankruptcy that only apply to very specific situations. For example, Chapter 15 bankruptcy is designed for individuals and businesses outside of the United States that can no longer pay off their debts inside the United States. Another example is Chapter 12 bankruptcy. This form of bankruptcy only deals with the debt of farmers or fishermen. However, for individuals living in the United States, the two kinds of bankruptcy most often filed are Chapter 7 and Chapter 13.
Chapter 7 Bankruptcy
As mentioned earlier, Chapter 7 bankruptcy is available to both individuals and businesses. The biggest difference, however, is that a business will usually close its doors forever as part of the process. An individual will instead receive a relatively clean slate so he or she can start over again once the four to six month process has been completed.
One of the most important elements of a Chapter 7 bankruptcy is liquidation. Liquidation, in this instance, refers to a process by which a person’s assets are acquired by a bankruptcy court so those assets can be sold off. The proceeds from this liquidation are then used to pay back some or all of the debt that a person owes to creditors.
Some people may be worried that all of their possessions could be sold off in liquidation as part of a Chapter 7 bankruptcy. Thankfully, this is certainly not the case. Much of what a person owns can in fact be declared exempt from liquidation. The things that can be declared exempt vary from sate to state, depending on a state’s bankruptcy laws. Some states are rather generous while others are not. In general, however, if a person does not owe significant money on a home or a vehicle, that person will be allowed to keep the home she lives in as well as her primary means of transportation. However, things like second homes, second cars, and collectibles are likely to be liquidated.
Chapter 13 Bankruptcy
Chapter 13 bankruptcy is a form of bankruptcy that was introduced rather recently in the United States. It was introduced by lawmakers with the assumption that Chapter 7 bankruptcy is abused by individuals who can pay back more of their debts than they usually do. It was believed that this abuse hurt businesses and put a strain on the US economy. Chapter 13, unlike Chapter 7, is more of a reorganization of a person’s debts. This reorganization is supposed to occur in a way that it gives that person back the ability to pay off a majority of his or her debt in the time frame of three to five years. After this period, a person will likely be free of most or all of this debt.
During this process of Chapter 13 bankruptcy, an individual will work with appointed debt counselors. With these counselors, a person’s income, expenses, and debt will be reviewed and analyzed. From this analysis, a payment plan will be developed that will allow the person declaring bankruptcy to pay off his or her debts in a way that person can manage. Debts will be prioritized. Things like back taxes and child support will be given highest priority. Second priority will be given to secured debt that could result in a person losing his or her property. Last priority will be given to unsecured debt such as credit card debt.
The one benefit of Chapter 13 over Chapter 7 is that the person declaring bankruptcy will be allowed to keep more of his or her property. Still, Chapter 7 holds plenty of advantages that make it the preferred choice for many Americans. Whether one must file for Chapter 7 or Chapter 13 is determined by a “means test” that examines a person’s income level in comparison to other households in that person’s area.
