Bankruptcy

   Bankruptcy is a word that conjures up all kinds of thoughts and emotions in people. For some irresponsible entities, bankruptcy means living high off the hog, buying and spending well in excess of their means, knowing their debts will be wiped out by a bankruptcy filing.  For other people, they're panic stricken and close to a nervous breakdown, thinking they'll lose everything on their way to the poor house. 

What is Bankruptcy?

What exactly is bankruptcy?  Bankruptcy is a federal legal solution for individuals and businesses that are experiencing financial difficulties and can't pay their bills.  It is a form of debt relief and financial management. 
There are different ways of filing bankruptcy, depending on the situation. The most common are:

Chapter 7  Bankruptcy, a form of personal bankruptcy

Chapter 11 Bankruptcy, a form of business bankruptcy

Chapter 13 Bankruptcy, a form of personal bankruptcy

     Chapter 7 bankruptcy  and Chapter 13 bankruptcy filings are for individuals filing for personal bankruptcy.  The difference between the two depends on whether or there is a liquidation of assets or a restructuring of debt and payment schedule.  In a Chapter 7 bankruptcy filing, all assets that are not subject to exemption are liquidated with the proceeds used to payoff the debts as much as possible.  This is known as a straight bankruptcy in which the debts are discharged and the individual more or less starts over. This kind of filing can only take place once every six years.

      A Chapter 13 bankruptcy filing results in more of a reorganization of the debts and financial management than liquidation of assets.  It results in a reorganized payment schedule out of future earnings over a longer time period, usually three to five years.  The debts are not discharged in this case, they are restructured and paid. 

    Chapter 13 bankruptcy filings are for businesses.  Businesses can also liquidate or reorganize.  In liquidation a court appointed trustee takes title to the property and handles the liquidation.

Bankruptcy for Individuals

For individuals, whether they file under Chapter 7 bankruptcy or Chapter 13 bankruptcy, the filing still leaves a bankruptcy record on their credit report for ten years.  This may make it more difficult to get car loans or mortgages or other forms of credit during that period.  Difficult is not impossible since there are many entities that cater to people in this category.

      Even though bankruptcy filings are in a federal court, the laws differ from state to state as to what is and isn't exempt.  For the most part, child support, alimony and student loan obligations are not exempt.  Your credit counselor and bankruptcy attorney will have the details for the particulars in your state.

      Under current bankruptcy law, an entity cannot just walk into court and file.  Credit counseling with an approved agency is required before a bankruptcy filing can be made and the agency must be approved by the United States Trustee's Office.   A discharge cannot be obtained without proof of counseling for personal financial management.  Some individuals in higher income brackets cannot file for liquidation but must undergo reorganization.  The purpose of the pre-filing counseling is to determine whether you are a candidate for bankruptcy filing, with proper financial management assistance you may be able to avoid bankruptcy.