What is Bankruptcy?
Bankruptcy or Filing Bankruptcy refers to the formal court process for consumers to pay back or eliminate debt.
It occurs when a person or entity cannot pay back its loans or bills. Bankruptcy proceedings are typically initiated by the debtor but can be forced by creditors in certain situations, which is called ”involuntary bankruptcy.”
Anyone who files for bankruptcy is referred to as a ”petitioner.”
Bankruptcy Pros and Cons
|Stops collection activities by creditors||Hurts credit score|
|Can reduce or wipe out unsecured debt||Does not wipe out all kinds of debt|
|Can reduce or wipe out credit card debt||Does not eliminate alimony and child support obligations|
|Can block creditor harassment||Does not eliminate all liens, most tax debt, and secured debt|
|Allows you to keep Social Security, pension, or retirement plan benefits||Property can be repossessed|
|Helps you regain control of your finances||Does not cancel out student loans|
Types of bankruptcy
Chapter 7: Liquidation
For individuals or companies.
This is the most common type of bankruptcy filed.
Under Chapter 7, you are allowed to keep some major assets while your debts are dismissed, but some assets may be sold to pay your creditors and trustees. It will remain on your credit report for ten years.
You are only eligible for Chapter 7 if you don’t have income sufficient to file Chapter 13.
Chapter 13: Adjustment of debts
Second most common type of bankruptcy.
Chapter 13 is restructuring of a person’s debt. It helps individuals with regular income devise a plan to repay some or all of their debts. The debtor will make installments to creditors over three to five years. To qualify and file for a Chapter 13 bankruptcy, you must receive credit counseling from an agency approved by the U.S. Trustee’s office.
The benefit of this plan is that the debtor can keep their property and save their home from foreclosure. The downside is that it stays on your credit report for seven years.
Chapter 11: Restructuring
For individuals or companies but mostly used by businesses.
Third most popular type and the most expensive.
Chapter 11 allows debtors to propose a plan to repay their creditors without giving up control of their assets.
This section of the code is intended to help businesses that are in financial trouble find a way to become profitable again while still paying their debts over time.
Debtor in possession
Unlike filings under Chapters 7 and 13, businesses that file for Chapter 11 bankruptcy don’t automatically give up assets, such as real estate, investments, vehicles, and equipment, to creditors. Instead, the business is allowed to operate as usual while the owner develops a long-term plan of repayment, subject to court approval.
A petitioner under Chapter 11 is called a “debtor in possession.”
- Individual Chapter 11 filings are very rare. Less than 1% of filings are from individuals.
- The Lehman Brothers bankruptcy of 2008 was the largest bankruptcy filing in history, with $639 billion in assets and $619 billion in debt.
- Though he has never declared personal bankruptcy, Donald Trump has filed for corporate bankruptcy under Chapter 11 six times since 1991, making him the top filer in recent decades.
- Chapter 12 is the chapter used by farmers or commercial fishermen to restructure their debts.