Bankruptcy is a legal status that allows a person or business to be relieved of certain debts and liabilities. Essentially, a bankruptcy declaration is a formal recognition that an individual or entity is unable to pay their debts and therefore should receive relief from creditors. Bankruptcy can be declared either by a court order or voluntarily.
For business professionals, it is important to understand the different types of bankruptcies available and the implications they have. In the United States, the two most common types of bankruptcy are Chapter 7 and Chapter 13 bankruptcy.
Chapter 7 Bankruptcy
Chapter 7 bankruptcy is also known as liquidation bankruptcy, and it is the option that patients to immediately discharge or forgive most of their debt obligations. In order to qualify for Chapter 7 bankruptcy, individuals must meet certain income requirements and prove that they are unable to reasonably pay off their debts. While many debts may be discharged under Chapter 7 bankruptcy, individuals may still be responsible for certain types of debts including student loans, taxes, and alimony.
Chapter 13 Bankruptcy
In contrast to Chapter 7 bankruptcy, Chapter 13 bankruptcy is also known as reorganization bankruptcy. Individuals who cannot successfully qualify for a Chapter 7 bankruptcy are often eligible for Chapter 13. Under a Chapter 13 bankruptcy, individuals are able to keep their possessions in exchange for setting up a repayment plan.
Compared to Chapter 7, Chapter 13 bankruptcy provides individuals with more control over their repayment plan. Generally, individuals will be required to pay off their debts over the course of three years, and the repayment plan must be approved in court. While all eligible debts must be repaid under this plan, individuals are usually able to lower their payments to a more manageable amount.
The Benefits of Bankruptcy
For individuals dealing with serious debt problems, bankruptcy can provide much-needed relief. While bankruptcy is a major financial decision that should not be taken lightly, many individuals find immense relief from declaring bankruptcy. After filing for bankruptcy, creditors will no longer be able to take legal action against the individual for their debts. This allows individuals to take some control over their financial future and begin to rebuild their credit score.
For business professionals, it is important to understand the implications of declaring bankruptcy, and if declaring bankruptcy is the right option for themselves or their business. Bankruptcy should only be considered as a final option after all other options have been explored but sometimes, bankruptcy can be the best option for individuals to take control of their financial future.