Although some people tend to stigmatize bankruptcy, the reality is that most Americans struggle to make payments on their mortgage, car loans, credit cards, medical bills, or other kinds of debt. Many businesses also face the same struggle with business debts or asset maintenance. Oftentimes, these struggles are caused by external factors over which a person or business has no control over. For example, nationwide or local economic conditions may negatively impact income levels, or there may be problems with a particular industry. If this sounds like you, don’t let the fear of irrational stigmas stop you from escaping oppressive debts and getting a fresh financial start! We can help! Please take a moment to understand the basics of bankruptcy:
Bankruptcy is the legal procedure by which a debtor’s previous debts are either discharged or restructured, and the debtor is provided with enough assets to live on so that he or she can have a fresh financial restart. When debts are discharged, the bankruptcy court prohibits creditors from taking any form of collection action on such debts. The debtor is no longer legally required to pay on discharged debts. When debts are restructured, a repayment plan is proposed under which a debtor can make installment payments to creditors over a three to five year period. Below is a brief description of the different types of bankruptcy chapters available.
Under a chapter 7 bankruptcy, a debtor’s property is separated into two categories: exempt assets and nonexempt assets. Exempt assets are those property considered essential for economic survival, and retained by the debtor. Nonexempt assets are turned over to a bankruptcy trustee, who then liquidates (sells) them and uses the proceeds to pay the creditors. The debtor’s debts are then wiped out, and he or she is forever released from any obligation to repay the remaining debt. It is important to note that partnerships and corporations filing under chapter 7 will not have their debts discharged.
Chapter 11 Bankruptcy
A chapter 11 bankruptcy is primarily used by business debtors to continue business operations while reorganizing its financial affairs. Reorganization refers to the attempt to reduce debt by selling less profitable assets or lines of businesses, cutting operating costs, increasing profitability, stretching out secured debt to improve cash flow, and paying unsecured creditors a fraction of their debt. In some instances, reorganization involves liquidating a business’s assets to pay off creditors. However, because chapter 11 bankruptcies are extraordinarily complex, it is generally only appropriate for the larger businesses.
Chapter 12 Bankruptcy
Chapter 12 bankruptcy is specifically designed for family farmers or family fishermen who are in financial distress. It is modeled on a chapter 13 bankruptcy, and therefore operates very similar to it. However, it is more streamlined, less complicated, and generally less expensive than a chapter 13 bankruptcy.
Under a chapter 13 bankruptcy, a debtor’s debts are restructured and a repayment plan is created for the debtor. The repayment plan acts like a consolidation loan under which the debtor makes plan payments to a bankruptcy trustee, who then distributes the payments to the creditor. The major advantage of a chapter 13 bankruptcy is that none of the debtor’s assets are liquidated. Furthermore, foreclosure proceedings against a debtor’s home can also be stopped, and their payments may be lowered.