Though it is a common enough word, what exactly does bankruptcy mean? And what are its implications? As is to be expected, filing for bankruptcy is a complicated process but before such a step is taken it is essential to understand exactly what it is all about.
The two kinds of bankruptcy that you can file for are Chapter 7 and Chapter 13. There are various factors that would determine whether you should opt for Chapter 7 or Chapter 13. Through Chapter 7 Bankruptcy you can use liquidation, which literally means that you sell off property in order cover as much of the debt as possible, but at the same time you will have enough of the property left over in order for you to start all over again financially. On the other hand, the Chapter 13 Bankruptcy is the reorganization type of bankruptcy where the debtor is allowed three to five years over which to pay back the debts.
One should keep in mind that there are intricate details to this legal process that should be taken into consideration before decisions are made about filing for bankruptcy. Who qualifies? Which kind would apply to you? And will you be able to keep your property? There are many such questions that arise in such a situation. It would be a good idea to consult a competent bankruptcy attorney who can guide you through these complicated decisions and procedures.
Filing for bankruptcy cannot be the solution to all your financial problems though. In fact, bankruptcy cannot cover all kinds of debts. Common kinds of debts that bankruptcy does cover are credit card debts, medical bills and unsecured loans. However, debts related to child and spouse support and other tax debts cannot be covered in bankruptcy.
Bankruptcy law allows for the development of a plan that gives the debtor an opportunity to resolve large amounts of debt through the division of assets among interested creditors. This division treats the creditors with a degree of equality. Certain proceedings allow a debtor to remain in business and use generated revenue and future income to resolve debts.
Bankruptcy also allows debtors to be free from their debts or for them to be discharged. After the assets are distributed the debtor can be discharged from past financial obligations even if all of the creditor’s debts have not been completely paid. The debtor is given financial relief while the creditor is given a sense of certainty as to the amount and time of payments. This sounds scary…but in the vast majority of Bankruptcy cases, the debtor does not lose any assets. This is done through Federal and/or State exemptions.
Mentioned above are the two main purposes of bankruptcy: debtor relief and equity among creditors. In regard to the first purpose, debtors are no longer threatened by an ominous debt lurking over their heads and the constant pressure of creditors. In one of their many opinions, the Supreme Court of the United States described the feeling a debtor has after a bankruptcy as “a new opportunity in life, unhampered by the pressure and discouragement of pre-existing debt.”
Creditor equity revolves around the idea of equal treatment of creditors in similar situations. A similar creditor refers to the type of debt and priority to fulfillment of the debt. This concept requires creditors to negotiate and cooperate with the debtor’s attorney as opposed to harassing and threatening the debtor.
Bankruptcy provides a crutch to risk takers and entrepreneurs allowing them to add valuable skills to the market. Bankruptcy is not only good for the debtor and creditors, but society as well.