Bankruptcy

About Bankruptcy

For individuals who are facing financial difficulties, debt is one of the biggest challenges to deal with. Fortunately, bankruptcy provides a legal route out, designed to give debtors a new start by eliminating most debts. While bankruptcy does provide relief, it may involve major sacrifices on the part of the debtor, for example, forfeiting a percentage of income and liquidating assets.

Bankruptcy is the process by which a person legally declares himself or his business unable to pay outstanding debts. There are several different types of bankruptcy and some are available only in particular circumstances. The process involves meeting with a judge to determine payment schedule or, in some cases, declaring legal bankruptcy discharging most or all debts. When a business declares bankruptcy, that business will either close or continue to function with reduced payments to debtors.

Chapter 11

Chapter 11 of the U.S. Bankruptcy Code provides for the reorganization of the assets and liabilities of corporations or partnerships that are unable to pay their creditors. While individuals can also file for Chapter 11 bankruptcy, it is a far less common route because the eligibility requirements are strict and the proceedings can be the most complex and expensive bankruptcy option.

The process of Chapter 11 bankruptcy is started by filing a petition in the Bankruptcy Court in the area where the debtor is domiciled or incorporated. A debtor may choose to file voluntarily if certain requirements are met or involuntarily by a creditor or creditors who meet specific criteria.

A Chapter 11 debtor proposes a plan whereby the business will remain alive through a restructure and a payment plan for creditors. If accepted, the debtor may continue the business and become the “debtor in possession” though the business would be subject to the oversight of the court and the debtor may be forced to relinquish control over major decisions.

Chapter 13

Chapter 13 bankruptcy is known as a wage earner’s plan and provides for management of debt. This type of bankruptcy enables individuals with regular income, who meet specific requirements, to keep their property while repaying creditors from their future income according to a strict schedule.

A Chapter 13 bankruptcy petition is filed in the Bankruptcy Court in the area of the debtor’s residence or domicile. The debtor proposes a repayment plan which must then be approved by the court. Upon approval, the court will appoint a Chapter 13 trustee who distributes the funds to the creditors for a percentage fee. During the repayment period, which is between 3 and 5 years, creditors are not permitted to start or continue collection efforts.

Chapter 7

For individuals with limited income who find themselves unable to pay back heavy debt, Chapter 7 bankruptcy, known as “liquidation bankruptcy” can provide debt relief. It is the most common form of bankruptcy filed in the U.S.
Chapter 7 involves the liquidation of many of the debtor’s assets by a court-appointed trustee who takes ownership of those assets, sells them and then distributes the proceeds to creditors.

There are several types of exempt assets, regulated by both federal and state bankruptcy statutes, which cannot be liquidated, helping the debtor when the time comes to start fresh.

Chapter 7 bankruptcy is filed in your local Bankruptcy Court and the petition must include documents which detail your assets and liabilities. Most individuals who choose to file Chapter 7 are required to first participate in a session with an approved credit counselor.

Debt Relief

Heavy debt is a huge financial and emotional burden for most Individuals to carry. While bankruptcy is one option to manage debt, it is generally considered to be a last resort as it stays on your credit record for 10 years. Bankruptcy can have far reaching, negative effects on many aspects of your life, for example your ability to get credit, find employment, and rent or buy a home.

So while paying down debt can be a gut wrenching process, there are several ways to get a grip on it without resorting to bankruptcy. These include prioritizing which debts to pay off first, meeting with a reputable debt or consumer credit counselor to help balance larger financial issues with your day-to-day cash flow, debt negotiation and repayment plans, and creating and sticking to a practical budget.

Student Loans

Student loans have become increasingly popular, offering opportunities to those who otherwise couldn’t afford college tuition. At the same time, student loans can also present a significant financial risk. While many college graduates find jobs enabling them to repay the loans, graduating with a degree doesn’t necessarily guarantee that ability especially in a time of economic uncertainty.

It’s important to choose your student loans carefully. Student loans are offered by the federal government, the educational institution (and backed by the federal government), or a private lender. There are several types of federally procured loans and they generally have lower rates, which are fixed throughout the period of the loan. They also offer more flexible repayment options which can be changed based on the borrower’s circumstances and income.

Private loans are provided by banks or credit unions and vary from lender to lender. They may offer lower rates at first but only for variable interest rate loans which can get higher based on broader interest rate hikes. Most private loans require a co-signer as students typically don’t have much of a credit history. In addition, private loans aren’t subject to the same rules and regulations as federal loans and may not be as flexible regarding repayment options.