What is Bankruptcy?

Bankruptcy is pretty much a scary proposition. The term itself already sounds so ominous. And it does not really help when the media bombard nightmare stories of seemingly successful business going from the top to the bottom. Still, bankruptcy covers anything from personal to business spectrum.

Interestingly, bankruptcy provides you with the opportunity to get out from any substantial debt while having to treat creditors in a very fair manner. Once the process is complete, the debtor (the person filing for bankruptcy) will experience the so-called “fresh start.” You simply get the chance to start over without the unwanted burden of unpaid bills.

For the most part of it, bankruptcy falls into one of two types – liquidation and reorganization.

Liquidation – In order to qualify for wiping out your debt, you need to agree that the trustee can both take and liquidate (i.e. sell) some of the property in order to pay back the debt. However, you can always keep (i.e. exempt) property as per the state law.

Reorganization – Bankruptcy is also designed to reorganize debt, particularly for high-income earning persons, though it is often made available to others. While you can keep the entirety of your property, you are required to pay the creditors the value involved in any nonexempt assets. This is simply part of a three- to five-year bankruptcy payment plan, including any additional discretionary income based on the bankruptcy rules.

To help you assess your financial danger zone, ask yourself these questions:

Are bill creditors always calling you?

Are you seriously considering debt consolidation?

Do you even have a general idea of how much you owe exactly?

Does the idea of sorting each of your finances somehow make you feel out of control and scared?

Do you mostly use credit cards to pay utilities?

Assessing Your Situation

If your answers are mostly yes, then it is time you give your financial situation a little more thought. Remember: Bankruptcy happens when you owe more than you can afford. That is why most financial gurus advise to never bite more than you can chew. It is bad for you and the business. To determine where you stand financially, make sure to inventory all of your liquid assets. This also includes, but not limited to, bonds, college savings accounts, funds, real estate, stocks, vehicles, and other non-bank account funds. Come up with a rough estimate for each item. From there, start collecting and adding all your credit statements and bills. If you find out that the value of your asset is incredibly less than the debt you owe, then your only way of this sticky financial position is filing for bankruptcy. Just keep in mind that bankruptcy should never ever be approached casually. It is not a cure-all process for resolving the out-of-control debt, so make sure you understand the complexities involved.

Filing for Bankruptcy

For starters, there are two main ways for you to go bankrupt. Of course, the most common route is to simply file for bankruptcy voluntarily. The second one is when creditors ask the court to order you a bankrupt. While there are several ways to file for bankruptcy, each of them comes with pros and cons. So, as much as possible, consult this first with a lawyer before proceeding in order to determine the best course of action to take.

Introducing Chapter 7 Bankruptcy

Apparently, there are more and more people filing for Chapter 7 Bankruptcy. So, whatever your reason is for filing, you are not alone. Still, some of the most common reasons are huge medical expenses, marital issues, overextended credit, and unemployment just to name a few. This type of filing for bankruptcy is often deemed as a “straight bankruptcy.” That is because Chapter 7 simply liquidates all of your assets in order to pay off as much debt as possible. As for the cash acquired from your asset, it is distributed to creditors such as banks and credit card companies.

You are expected to receive a notice of discharge, at least, within 4 months. Still, the record of your bankruptcy will be held on your credit card report, and this will be visible for 10 years. Do not be burdened, though. It is not the end of the world for you. In fact, lots of people who file for Chapter 7 bankruptcy managed to buy homes despite the financial situation they previously had, not to mention the bankruptcy record. Just think of this chapter as your way to starting quick and fresh.

It is worth noting, however, that Chapter 7 Bankruptcy is not applicable to everyone. Almost all assets are taken and sold just to pay creditors. So, if you own a company, a home for your family, or even other items deemed personal assets, it is safe to that this chapter is not always the best option there is.

Introducing Chapter 13 Bankruptcy

Do you have a property like a mansion, and do you want to keep it? If yes, then there is no doubt Chapter 13 Bankruptcy is for you. Also known as reorganization bankruptcy, this one here enables you to pay off your debts over a certain period of time (though, in most cases, it is usually 3 to 5 years). And if you have a record of consistent and predictable yearly income, it is likely for this chapter to provide you with a grace period. Keep in mind that any debts that have remained at the end of the declared grace period are automatically discharged.

Once your Chapter 13 filing for bankruptcy is approved, creditors are required by law to stop contacting you in any form. This gives you the opportunity to continue working and paying off your debts over the next coming years. Above all, while doing all of these you get to keep your precious property and/or possessions. Again, like Chapter 7, this type of bankruptcy does not work for everybody; hence it is best to consult with your lawyer.

Scary But Undeniably Necessary

It holds true that filing for bankruptcy is a scary idea, let alone experience the process involved. It is even hard to admit to yourself that you need help in getting out of debts. As hard and scary as it may sound, you can never do it alone. Otherwise, the government would not be introducing bankruptcy laws whatsoever. These are all designed to protect you, not just the creditors if you have outstanding debts in place.