What is bankruptcy?

Bankruptcy is a legal process in which a person or an entity (government, corporation, etc.) declares that they can no longer pay the money that they owe to creditors. The main objective of the bankruptcy laws is to give the debtor a fresh start, by wiping out most of their debts, so that they can start earning an income to pay their remaining debts.

Bankruptcy is a legal proceeding in which a debtor declares bankruptcy and seeks to have some or all of their debts discharged.

Bankruptcy can be initiated by filing for personal bankruptcy or by the assignment for the benefit of creditors, which is less common.

There are four main types of petitionable debt:

  • Unsecured
  • Secured
  • Priority and
  • Dischargeable

How Bankruptcy Works ?

1. File a Petition

The first order of business for declaring bankruptcy is to file a bankruptcy petition in the federal bankruptcy court. This petition shows you would like to be under bankruptcy protection and ushers the legal process of bankruptcy.

2. This means that the Automatic Stay rules apply at this point.

Once you file a bankruptcy petition, you get an automatic stay order that halts all the proceedings. It will also temporarily halt collection activities such as garnishment of wages, calls and letters, lawsuits, and even foreclosures. It buys you time, as is the case with most clichés that have merits if looked at from another perspective.

3. Attend a Meeting of Creditors 341 Meeting

After approximately 20-30 days from filing, there is a meeting with creditors, where the debtor and bankruptcy trustee as well as the creditors who may have questions to ask, meet. The trustee will wish to go through with your documents and be certain you are eligible.

4. Businesses can also be liquidated through the selling of assets.

This kind of assets which you have as a second car, valuable paintings, other houses, or any other asset that is considered nonexempt can be sold to clear your debts. Other exemptions include books, basic household items, household furniture, clothes, and the primary dwelling.

5. Creditors File Any Objections

After scrutinizing the debts and assets any of the creditors who may feel that they have been left out will usually file objections with the court. Some of the most common concerns include claims that some of the assets deemed nonexempt should be protected by creditors.

6. Discharge the eligible debt of the patient where applicable.

In turn, if the entity satisfies all the requirements and there are no further objections, the debtor will get a discharge of his or her dischargeable debt. This means that any unpaid debts that you may owe are likely to be washed off. That however is not allowed for some types of debts like student loans, and debts owed to the government for alimony.

What Are the Types of Bankruptcy Filings?

Chapter 7 Bankruptcy

Chapter 7 bankruptcy commonly referred to as liquidation bankruptcy is also the most common type of bankruptcy in the United States. This process entails selling almost all assets that have the status of exempt to clear as much of the liability as possible. Any outstanding unpaid balance is forgiven, with very limited exceptions such as learning institution loans and child support. Chapter 7 allows for the discharge of large amounts of debt without much regard to the ability of the debtor to repay some of it, but a means test is done to check if the filer can repay some debts or if they would be unable to do so if they continue being forced to pay. If the filer qualifies for Chapter 13, the court selects a trustee to sell off the filer’s non-exempt property and then distribute the proceeds to the creditors. Most of the remaining debts are discharged by the filer and the person gets a new financial beginning once the case is over.

Chapter 11 Bankruptcy

In Chapter 11, the business is protected from its creditors while it is allowed to restructure itself and pay off the debts. The business consolidates a restructuring framework indicating how it intends to transform its operations to become profitable and commence repaying creditors. This must be agreed to by creditors and the bankruptcy court. If approved, the operations of the business go on under the supervision of the court. The advantage is that the business can re-finance debts in a way that it can avoid going out of business. However, formulating the reorganization plan may be involving and not all the creditors will support the formulation of the plan. In sum, Chapter 11 is an opportunity for a firm that is in a bad financial standing to be given another chance rather than sell its assets and pay creditors.

Chapter 13 Bankruptcy

Chapter 13 bankruptcy is a form of personal bankruptcy that many people have filed in the United States.

In this chapter, it is explained how to file for Chapter 13 bankruptcy and what the benefits of doing so are. It also discusses some of the major problems that individuals and businesses should avoid during this process.

Chapter 13 bankruptcy is meant to give people an opportunity to save their homes from foreclosure, pay back a portion of their debts, and start over again with a clean slate.

Bankruptcy Alternatives

Credit scores, also called credit reports, are used to determine borrowing capacity. They are determined by a person's credit history. One of the ways to improve your credit score is by disputing errors on your credit report.

Bankruptcy alternatives should be considered instead of filing for bankruptcy when one cannot afford all the loan repayments. There are programs available such as debt settlement and debt negotiation services which can help you reduce your debts by up to 30%.

Being Discharged From Bankruptcy

Listening that I got discharged from bankruptcy was one of the biggest reliefs of my life. As for me, for years I have been burdened with the thought of huge debts I could not repay and, therefore, bankruptcy helped me have a clean slate financially. As I have mentioned, those debts which have been many have been cleared by the court and I am therefore in no legal position to pay them again. At least, it means I can start rebuilding my credit from here and beginning the process of making my credit a positive one. Although this bankruptcy will remain on my credit report for years, I am glad for a second chance and being able to experience firsthand how it feels to fail. As for the next steps, I will be much more cautious about accumulating any debts which cannot be paid off at the earliest time. This is a new start for me financially and I will have financial freedom in the near future.