If you're overwhelmed with debt, filing for bankruptcy can give you a fresh financial start—but it's important to know what you're getting into. Find step-by-step guides for filing for the different types of bankruptcy, as well as any pitfalls and legal challenges you might run into in the process.
Bankruptcy is a legal process designed to help individuals and companies get a financial fresh start by discarding or making arrangements to repay unmanageable debt. It allows people who can no longer pay their debts to liquidate assets or create a repayment plan, ultimately removing the debts. While there are several different types of bankruptcy and different qualifying factors for each, the end goal is the same: to be discharged from debts and get a financial fresh start.
Filing for bankruptcy can impact your credit. If you filed for protection using Chapters 7, 11, 12, or 13 of the Bankruptcy Code, the information will remain on your credit report for up to 10 years from the date of when the request was filed. That being said, the impact bankruptcy will have on your credit will decrease as time passes and as you add positive information to your credit report. In some cases, the information can be reported for longer than 10 years.
To file for bankruptcy, a person, couple, or corporation must file a petition to the bankruptcy court. This is how a bankruptcy case will begin. All bankruptcy cases are accepted and managed in federal courts under specific regulations outlined in the U.S. Bankruptcy Code.
Chapter 7 bankruptcy eliminates most debt through the liquidation of assets. The court appoints a trustee to oversee your case, and part of the trustee's job is to take ownership of your assets, sell them, and distribute that money to your creditors. Chapter 7 bankruptcy is the most common type of bankruptcy in the United States.
Chapter 13 bankruptcy allows a debtor to seek shelter from creditors and set up a debt repayment plan while protecting their assets from liquidation. It is a common type of bankruptcy, but it's only available to individuals with sufficient income to stick with the repayment plan.
A trustee is someone who has administrative control of property (like business assets) in trust. The trustee has a fiduciary duty to administer the property impartially for a person or business. A bankruptcy trustee is a special kind of trustee who oversees a bankruptcy case.
A bankruptcy discharge is a court order issued at the end of a Chapter 7 or Chapter 13 bankruptcy proceeding. The order relieves the debtor from any obligation to repay the debts that have been discharged. Debts that are likely to be discharged in a bankruptcy proceeding include credit card debts, medical bills, lawsuit judgments, personal loans, obligations under a lease or other contract, and other unsecured debts.
When an individual or company files for bankruptcy, they are required to settle preferred debts before other types of debts. The funds collected after liquidating assets are then used to pay off preferred debts. Any amount remaining (if any) can then go to settle other debts. There are several types of preferred debt, including taxes, preferred stock, employee wages, and home mortgages.
Senior debt is money borrowed by a company that must be repaid first during bankruptcy. Junior debtholders and shareholders also have a claim on the company’s assets and cash flow, but these claims are lower priority if the company defaults on its debt. Senior debt is often held by banks and secured by collateral.
Voluntary bankruptcy is a legal filing wherein a person initiates bankruptcy when they can’t pay their outstanding debt. If a person or a business has exhausted all their options and still can’t repay what they owe, they can file for voluntary bankruptcy.
Nondischargeable debts are those debts that can't be forgiven in a bankruptcy. If your debts have overtaken you, bankruptcy is often the only way to start over and be relieved of the liabilities that have piled up. However, the U.S. Courts consider several types of debt nondischargeable. In other words, you'll still owe those creditors even if your bankruptcy is discharged.
Involuntary bankruptcies are sought by creditors unwilling to wait for borrowers to make the decision to file for bankruptcy on their own. They may be faced with a borrower who is squandering assets or isn’t paying their debts as they come due, but has assets that could be used to satisfy those debts.
Chapter 9 bankruptcy, also known as municipal bankruptcy, allows a municipality, county, or other taxing authority to seek protection from creditors in order to reorganize or adjust its debt obligations. Although rare, chapter 9 cases can involve significant amounts of debt.
Chapter 11 bankruptcy allows businesses to seek debt relief and protection from their creditors by reorganizing the business and its debts. It is the most complex, expensive type of bankruptcy in the U.S. Bankruptcy Code.
Chapter 12 bankruptcy provides a way for family farmers or family fishermen under financial distress to pay back their debts. If approved, it prevents creditors and collectors from taking action against the debtor while they pay back their debts. Because of the seasonal nature of farming and fishing operations, Chapter 12 offers more flexible payment arrangements than a standard Chapter 13 Arrangement.
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