What Is Bankruptcy?
Bankruptcy is a method–put in place by federal law–for individuals and businesses to discharge their debts. Bankruptcy can be confusing as certain kinds of debts cannot be discharged, while other kinds may only be disposed of subject to special terms and conditions. If a person can prove that they are bankrupt, however, the bankruptcy court will protect them during the bankruptcy process. Generally, there are two kinds of bankruptcies–reorganizations and liquidations. The two most common types of bankruptcies are the Chapter 7 and Chapter 13 type of bankruptcy, so named for the chapters in the U.S. bankruptcy code outlining their specifics.
Chapter 7 Bankruptcy
A Chapter 7 bankruptcy is a “liquidation” bankruptcy. This means that most (though not all) of your property can be seized and sold to pay your secured debts–things like a car note or mortgage. The upside to this method is that all of your unsecured debt–like the balance on a credit card–will be “wiped off” your record. Certain kinds of debts, like child support, alimony, and court fines and fees associated with a criminal conviction will not be wiped off your record. Chapter 7 bankruptcies are the most common type of bankruptcy employed by individual people, and they’re great for discharging consumer debts like those associated with a credit card or payday loan.
Chapter 13 Bankruptcy
A Chapter 13 bankruptcy is a “reorganization” type of debt discharge–though discharge may be a bit of a misnomer, here. A Chapter 13 bankruptcy means that, instead of seizing your assets and selling them to pay unsecured debts, the bankruptcy court will develop a repayment schedule (based on the law and input of both parties) worked out as part of the bankruptcy process. This allows the debtor to continue paying their obligations at a more manageable rate while hanging on to the property used to secure the debts–put another way, the Chapter 13 bankruptcy doesn’t wipe out debt, it just makes it easier to pay.
Chapter 13 bankruptcies are more difficult to qualify for, and applicants must have less than one million dollars in secured debt and less than $336,000 in unsecured debt to be eligible. Applicants also have to demonstrate a consistent income with which to make payments towards a court mandated repayment schedule–and again, the Chapter 13 bankruptcy is more of a debt reorganization procedure than a debt clearance one.
Chapter 11 Bankruptcy
This type of bankruptcy is most often filed by small businesses, although certain individuals with a lot of mortgaged property might also qualify for a Chapter 11 bankruptcy. The Chapter 11 is also frequently used by people who hold too much debt to qualify for the Chapter 13 proceedings mentioned above.
Chapter 11 bankruptcies are much more complex than either of the other two types discussed here, and a thorough audit of your situation conducted by an experienced bankruptcy specialist should be carried out before attempting this, or any other kind of bankruptcy, on your own.
So, Do I Still Have To Pay My Creditors?
In law school they say the answer to every legal question should begin with the phrase “well, it depends.” Bankruptcy is more a proof for that rule than an exception. Every type of bankruptcy differs slightly, and each has a set of advantages and disadvantages. If you’re struggling with a tough financial situation, you must not attempt to execute a bankruptcy on your own–rather, the very best thing you can do for yourself and those that depend on you is to consult with a bankruptcy expert before making any decisions that could have unintended consequences.
If you or a loved one are considering bankruptcy, consult the debt repayment experts at the Principal Firm, (407) 322-3003, today!
