What do you need to know?
Why Do People/Businesses File Bankruptcy?
When an individual or business is unable to pay debts, they may be able to file for bankruptcy. The goal is to achieve a “discharge” of eligible debts. This means that those creditors are permanently prohibited from trying to collect debts against you.
Bankruptcy does not wipe away all debts, however. Child support, spousal support, most tax debts, and most student loans, for example, cannot be discharged. You are still obligated to repay these debts.
3 Common Types of Bankruptcy
There are different types of bankruptcy, and which one you file depends on your specific financial situation. Let’s take a look at these “chapters.”
Chapter 7: This is known as “liquidation,” and is the most common chapter for individuals. Businesses can also use it if they are buried in debts and restructuring is not reasonable and/or if the business does not have substantial assets.
With Chapter 7, a bankruptcy trustee is appointed and tasked with selling all of your nonexempt property (exemptions are incredibly complex: the good news is that you will be able to exclude certain property or a portion of certain assets). The trustee then distributes the proceeds from liquidation amongst your creditors. After, those debts are “discharged,” even if not paid in full, and creditors may not attempt to go after you for them. They must cease contact immediately.
Chapter 13: This type of bankruptcy may be used by both individuals and sole proprietors. If you have regular income, you can file a plan to repay debts with the bankruptcy court. You will repay at least a portion of your outstanding debt over three to five years. If there is unsecured debt (e.g. credit card, medical, or utility bills) remaining after this period, it will be discharged.
Chapter 11: Businesses can utilize Chapter 11 bankruptcy to reorganize debt structures. This allows them to remain operational, and a court-appointed trustee ensures that they are following the terms of the court-approved reorganization/repayment plan. This is a long, complicated process with no guarantee of success.
We understand that this is not only a stressful time, it can be challenging to determine which type of bankruptcy will allow you to deal with your debt and move towards a more stable financial future. Our team can help you make this decision and proceed with clarity.