Definition of bankruptcy

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What is bankruptcy?

Bankruptcy is a legal proceeding involving a person or business unable to repay their unpaid debts. The bankruptcy process begins with a petition filed by the debtor, which is most common, or on behalf of creditors, which is less common. All of the debtor’s assets are measured and valued, and the assets can be used to repay part of the outstanding debt.

Key points to remember

  • Bankruptcy is a legal process conducted to allow individuals or companies to free themselves from their debts, while offering creditors a possibility of repayment.
  • Bankruptcy is handled by federal courts and the rules are described in the United States Bankruptcy Code.
  • There are different types of bankruptcy, commonly referred to by their chapter in the US Bankruptcy Code.
  • Bankruptcy can give you a fresh start, but it will stick on your credit reports for a number of years and make borrowing difficult in the future.

Understanding bankruptcy

Bankruptcy offers an individual or a business a chance to start from scratch by forgiving debts that simply cannot be paid while giving creditors a chance to get some repayment based on the individual’s assets or of the company available for liquidation. In theory, the ability to file for bankruptcy benefits the economy as a whole by giving individuals and businesses a second chance to access credit and offering creditors a portion of the debt repayment. Once the bankruptcy proceedings are successfully completed, the debtor is released from debts incurred before the bankruptcy filing.

All bankruptcy cases in the United States are handled by federal courts. All decisions in federal bankruptcy cases are made by a bankruptcy judge, including whether a debtor is eligible to file and whether he should be discharged from his debts. The administration of bankruptcy cases is often handled by a trustee, an agent appointed by the United States Trustee Program of the Department of Justice, to represent the debtor’s estate in the proceedings.There is usually very little direct contact between the debtor and the judge, unless there is an objection made in the case by a creditor.

Types of bankruptcy declarations

Bankruptcy filings in the United States fall under one of the many chapters of the Bankruptcy Code, including Chapter 7, which involves liquidation of assets; Chapter 11, which deals with reorganizations of companies or individuals; and Chapter 13, which organizes debt repayment with reduced covenants or specific payment plans. The costs of filing for bankruptcy vary depending on the type of bankruptcy, the complexity of the case and other factors.

Chapter 7 Bankruptcy

Individuals – and in some cases businesses, with little or no assets – typically file for Chapter 7 bankruptcy. This allows them to get rid of their unsecured debts, such as credit card balances and medical bills. . Those with non-exempt assets, such as family heirlooms (collections with high valuations, such as coin or stamp collections); second homes; and cash, stocks or bonds must liquidate the property to pay off some or all of their unsecured debts. A person who files for Chapter 7 bankruptcy essentially sells his assets to write off his debt. People who have no valuables and only have exempt goods, such as household items, clothing, tools for their trade and a personal vehicle of a maximum value of a certain value, can end up not repaying any part of their unsecured debt.

Chapter 11 Bankruptcy

Companies often file Chapter 11 bankruptcy, the goal of which is to reorganize, stay in business and become profitable again. Filing for Chapter 11 bankruptcy allows a business to create plans for profitability, cut costs, and find new ways to increase revenue. Their preferred shareholders, if any, can still receive payments, but common shareholders cannot.

On September 1, 2021, U.S. bankruptcy court judge Robert Drain approved a $ 4.5 billion settlement in the Chapter 11 bankruptcy of OxyContin maker Purdue Pharma LP. The settlement dissolves Purdue Pharma and creates a new public benefit corporation to fund the treatment and prevention of opioid addiction. It protects the former owners, the Sackler family, who will pay $ 4.5 billion over nine years, including federal settlement fees, against legal claims related to the opioid epidemic. Purdue has also agreed to release 30 million documents related to the case.

For example, a housekeeping company that files for Chapter 11 bankruptcy might slightly increase its rates and offer more services to become profitable. Chapter 11 bankruptcy allows the company to continue its business operations without interruption while working on a debt repayment plan under the supervision of the court. In rare cases, individuals can also file for Chapter 11 bankruptcy.

Chapter 13 Bankruptcy

People who earn too much money to be eligible for Chapter 7 bankruptcy can file a claim under Chapter 13, also known as a salary plan. It allows individuals, as well as businesses, with constant income, to create workable debt repayment plans. Repayment plans are generally spread over a period of three to five years. In exchange for repaying their creditors, the courts allow those debtors to keep all of their property, including non-exempt property.

Other bankruptcy declarations

While Chapter 7, Chapter 11 and Chapter 13 are the most common bankruptcy proceedings, especially with regard to individuals, the law also provides for several other types:

  • Chapter 9 bankruptcy is available to financially troubled municipalities, including cities, towns, counties and school districts. Under Chapter 9, municipalities do not have to liquidate assets to pay off their debts, but are instead allowed to develop a plan to pay them off over time.
  • Chapter 10 bankruptcy, which effectively ended in 1978, was a form of corporate bankruptcy that was superseded by Chapter 11.
  • Chapter 12 bankruptcy offers relief to family farms and fisheries. They are allowed to maintain their business while developing a plan to repay their debts.
  • Chapter 15 on bankruptcy was added to the law in 2005 to deal with cross-border cases involving debtors, assets, creditors and other parties who may be in more than one country. This type of request is usually filed in the debtor’s home country.

Being released from bankruptcy

When a debtor receives a discharge order, he or she is no longer legally bound to pay the debts specified in the order. In addition, any creditor listed on the discharge order cannot legally undertake any type of collection activity (such as making phone calls or sending letters) against the debtor once the discharge order is in effect.

However, not all debts can be paid. Some of these include tax claims, anything not listed by the debtor, child support or alimony payments, personal injury debts, and government debts. In addition, any secured creditor can still exercise a lien on the property belonging to the debtor, provided the lien is still valid.

Debtors are not necessarily entitled to a discharge. When a bankruptcy petition has been filed in court, creditors are given notice and can object to it if they wish. If they do, they will have to file a complaint in court before the deadline. This leads to the filing of an adversarial procedure to recover the sums due or to assert a privilege.

The Chapter 7 discharge is typically granted approximately four months after the debtor files a bankruptcy application. For any other type of bankruptcy, discharge can occur when it becomes practical.

Advantages and disadvantages of bankruptcy

Declaring bankruptcy can help you free yourself from your legal obligation to pay your debt and save your home, business, or your ability to function financially, depending on the type of bankruptcy petition you file. But it can also lower your credit rating, making it harder to get a loan, mortgage, or credit card, or buy a home or business, or rent a home. apartment.

If you are trying to decide whether to file for bankruptcy, your credit is probably already damaged. But it should be noted that a Chapter 7 filing will stay on your credit report for 10 years, while a Chapter 13 will stay there for seven years. Any creditors or lenders to whom you apply for new debt (such as a car loan, credit card, line of credit, or mortgage) will see the discharge on your report, which may prevent you from getting credit. .

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