What Is Bankruptcy
What is bankruptcy? Businesses and individuals usually file for bankruptcy due to money problems. However, bankruptcies don’t always stem from financial irresponsibility.
Only 5% of bankruptcies are due to reckless spending. Most people file for bankruptcy because of medical expenses. Not everyone can afford a surprise expense of that nature.
Bankruptcies have declined in recent years, especially among retail businesses. Some individuals still file for bankruptcy, but what exactly does the process entail?
We’ll answer some of the key questions in this article.
What Is Bankruptcy?
Some businesses and consumers get overwhelmed by their debts. They can’t keep up with obligations and find themselves spiraling into financial despair.
Bankruptcies can help financially struggling debtors eliminate debt or make it manageable. Creditors also get a way to regain the proceeds instead of writing off the debt.
Why Do People File for Bankruptcy?
People have been going bankrupt in 2022 and prior years due to money problems. Some people lose jobs, get divorced, or watch their investments plummet to zero.
These circumstances leave people and businesses with substantially fewer proceeds to cover obligations. They seek help from professionals such as OBryan Law bankruptcy lawyers to assist with the process.
Filing for bankruptcy can provide a new beginning or help with debts. This new beginning reduces the financial burden of unrealistic obligations.
The Bankruptcy Process
The bankruptcy process depends on the type of bankruptcy you’re filing. A team of professional lawyers can assist you through this process.
You’ll have to file a bankruptcy petition. This petition contains documentation of your finances. It must include your assets, income, expenses, and liabilities.
Applicants must submit their petition to the Bankruptcy Court. Your case begins after submitting the petition.
Then, you will meet with trustees. Sometimes, you will also meet with the creditor to discuss your financial situation. Your creditor will receive a notice 7-10 days after you submit the petition.
Parties will meet in court and eventually reach a verdict. You may get absolved of your debts but have to sell off your assets. In this case, a trustee will handle the sales and give proceeds to the creditor.
Some businesses and people will work out deals with creditors. They will set up repayment plans to make the debt less challenging.
The Advantages of Bankruptcy
Surprisingly, filing for bankruptcy has some advantages. You can eliminate old tax liabilities from over three years ago and stop paying the debt.
During the bankruptcy process, creditors can’t hound you for money. Even though you can’t eliminate student debt, you can take a break from making payments.
No one can file a lawsuit against you concerning your debt. Bankruptcy also protects you from missing payments, getting assets repossessed, and other risks.
You’ll get a fresh start and a break from harassing phone calls from creditors. Some of your possessions will get protected from bankruptcy.
Some states offer exemptions for certain items. No matter how deep you are in the hole, you can hold onto those possessions.
The Disadvantages of Bankruptcy
People and companies only file for bankruptcy because of financial distress. This filing will hurt your credit score and stay on your report for seven years.
Although bankruptcy will hurt your credit score, most debtors have low scores anyway. Failing to stay on top of obligations will also hurt your credit score. Filing for bankruptcy helps you avoid paying obligations until reaching a verdict.
You can rebuild your credit score over time. A fresh start from bankruptcy can make the rebuild easier.
Filing for bankruptcy will make your current credit cards void. You’ll have to get new ones in the future.
Living without credit cards for a bit can help with managing debt. Some credit cardholders practice unwise spending habits that lead to deeper debt. Credit cards are notorious for high-interest rates, making existing debt more challenging.
You may lose some possessions and will have difficulty getting a mortgage. Unfortunately, bankruptcy will not remove student debt. You’re still obligated to make those payments.
You can work out a deal with your student loan lender to lower monthly payments. They will extend the loan’s term and may charge a higher interest rate.
Debtors must explain to the judge how they got into this mess. This difficult conversation is necessary, but it’s not any easier.
A lawyer can tell the judge highlights. They can present you in a better light. Even then, you’ll have to tell the lawyer how you got into your predicament.
The Most Common Types of Bankruptcy
You can file for six different types of bankruptcy. Each type has specific parameters to keep everyone on the same page.
We’ll provide brief overviews of common bankruptcies: Chapters 7, 11, and 13.
Chapter 7 Bankruptcy
Chapter 7 Bankruptcies help individuals liquidate their debt. They want a fresh start and can’t keep up with obligations.
A creditor’s claims end after this filing. The creditor may get all, some, or none of their proceeds in return. Applicants can only file for Chapter 7 Bankruptcy if they can’t repay debts.
Chapter 11 Bankruptcy
Businesses work out a repayment plan with creditors. They come up with a business plan and explain how they will expand.
Businesses only go this route if they want to continue operating. The judge and creditor will review the business plan and make decisions.
Chapter 13 Bankruptcy
A Chapter 13 Bankruptcy is for individuals who can repay debts. Instead of liquidating, these people work with creditors to create a new payment plan.
Obligations become less burdensome because monthly payments become smaller and spread out. Debtors with enough funds to pay all or some of the debt must file a Chapter 13 bankruptcy.
Get Help With Your Bankruptcy
Now you know what is bankruptcy and your available choices. Filing for bankruptcy is a stressful process. It involves acknowledging your predicament and asking for money help.
Some people give up their assets while others restructure payment plans. Having the right team of lawyers can make the process less stressful. Lawyers can also protect some of your assets.
Want to learn more about bankruptcies? This blog contains many resources around the topic.
