What is bankruptcy?
Bankruptcy is a legal process that allows individuals or businesses to have their debts discharged or restructured in order to help them get back on their feet financially. In the United States, bankruptcy is governed by federal law through the Bankruptcy Code, which is found in Title 11 of the United States Code. There are several different types of bankruptcy that individuals and businesses can file for, each with its own set of rules and requirements.
Types of Bankruptcy for Individuals: Chapter 7
One of the most common types of bankruptcy for individuals is Chapter 7, also known as a “straight” or “liquidation” bankruptcy. Under this chapter, the individual’s assets are liquidated (sold) in order to pay off their creditors. The individual is then discharged from most of their debts, although some types of debts, such as taxes and student loans, are not dischargeable. In order to be eligible for Chapter 7 bankruptcy, the individual must pass a means test, which compares their income to the median income for their state and family size.
Types of Bankruptcy for Businesses: Chapter 13
Another common type of bankruptcy for individuals is Chapter 13, also known as a “wage earner” or “reorganization” bankruptcy. Under this chapter, the individual develops a repayment plan to pay off their debts over a period of three to five years. The individual is able to keep their assets and the repayment plan is based on their income and expenses. In order to be eligible for Chapter 13 bankruptcy, the individual must have a regular income and their debts must fall within certain limits.
Businesses can also file for bankruptcy under Chapter 7 or Chapter 11. Chapter 7 is similar to the individual version, where the business’s assets are liquidated in order to pay off creditors. Under Chapter 11, the business is able to continue operating while it develops a plan to pay off its debts and reorganize its operations. This type of bankruptcy is typically used by larger businesses and is often more complex and expensive than Chapter 7.
The Automatic Stay
When an individual or business files for bankruptcy, an automatic stay goes into effect. This means that creditors are not allowed to take any collection actions against the debtor, such as garnishing wages or foreclosing on a home. The automatic stay also stops any lawsuits that have been filed against the debtor.
In addition to the types of bankruptcy mentioned above, there are also other chapters of the Bankruptcy Code that can be used in specific circumstances. For example, Chapter 12 is available for farmers and fishermen, while Chapter 9 is available for municipalities.
Positive and Negative Effects of Bankruptcy
Filing for bankruptcy can have both positive and negative effects. On the one hand, it can provide individuals and businesses with a fresh start by discharging or restructuring their debts. On the other hand, it can also have a negative impact on credit scores and make it more difficult to obtain credit in the future.
It is important to note that filing for bankruptcy is a serious decision that should not be made lightly. It should only be considered as a last resort after all other options have been exhausted. Before filing for bankruptcy, individuals and businesses should speak with a lawyer or financial advisor to understand the process and the potential consequences.
In summary, bankruptcy is a legal process that allows individuals and businesses to have their debts discharged or restructured. The most common types of bankruptcy for individuals are Chapter 7 and Chapter 13, while businesses can file for Chapter 7 or Chapter 11. The process of filing for bankruptcy can provide a fresh start for those who are struggling financially, but it also has negative consequences and should be considered as a last resort. It is important to seek professional advice before making the decision to file for bankruptcy.