 It
happens. Everyone has at some point gone through the rigors of debt
problems. It is no easy task, overcoming your debt problems, and rarely
do people ever come out of it unscratched. Actually, for some people,
bankruptcy is a very real possibility.
So what exactly is bankruptcy? How do you know if
you even need it? And after you file one, what happens next? These are
only some of the questions you may have about bankruptcy.
Here, you will learn the answers to some of the
all-important questions involved in bankruptcy, including the types of
bankruptcy you may file, the pros and cons of filing for bankruptcy,
plus a brief history primer on how bankruptcy came to be.
What is Bankruptcy?
Bankruptcy, or insolvency as it is otherwise
known, is a legal declaration of an inability or an impairment to pay
for the debts owed to creditors. In simple words, it is an option that
debtors and creditors have whenever an individual cannot pay his debts
when they fall due.
There is admittedly a bad stigma around
bankruptcy. Although, when it comes to dealing with individual
insolvency cases, it should always be considered. Note that bankruptcy
is not permanent. It is a temporary case, thus, allowing you, the
debtor, to gain a fresh start.
Who should file for Bankruptcy?
As a general rule, anyone can go bankrupt. Even
individual members of a partnership can become insolvent. However, the
rules governing company or partnership bankruptcy and the procedures to
follow may be different from that filed by an individual.
There are three ways by which one becomes bankrupt:
- Voluntary: The insolvent debtor files for bankruptcy in a voluntary capacity.
- Involuntary:
The creditor takes the initiative to request that debtor should file
for bankruptcy for the purpose of collection.
- Supervisor-Initiated: Or anyone bound by an IVA.
More often than not, bankruptcy is legally
declared by the debtor himself. Though, there are cases wherein a case
of bankruptcy may be requested by the creditors in order to get
reimbursement from the debtor for the portion of the total amount owed
to them. This is what is meant by involuntary bankruptcy.
In an involuntary bankruptcy case, a court order
is generally issued to the debtor who is obliged to acknowledge the
proceedings or agree to them.
If you are the debtor, it is advised that you
completely cooperate with the bankruptcy proceedings, even when you are
disputing the creditor's claim. Any attempts at settlement should be
addressed before the bankruptcy petition is due to be heard. To do so
otherwise would be both costly and difficult.
Why is there a law on Bankruptcy?
What is the purpose of bankruptcy?
Bankruptcy is seen as a graceful way out of a
debt. Its primary purpose is to give an honest debtor a "fresh start"
in life. Therefore, bankruptcy is basically for the benefit of the
debtor who can no longer pay for the debts that he owed.
Most of the time, individuals or organizations
owe money to more than just one people and when the assets are no
longer enough to pay for all the debts owed to each creditor, it is but
fair to take the sum total of the assets and divide it up evenly among
the creditors in proportion to the debt owed.
The legal principle behind bankruptcy is that "one may not unjustly enrich himself at the expense of others." If the
bankrupt person were only to pay one creditor, what happens to the
other creditors?
Hence, the other purpose of bankruptcy law is to
repay creditors in an orderly manner to the extent of the total amount
of properties and other assets that the debtor has available for
payment.
The resolution of the debtor's debts is
accomplished through bankruptcy by dividing all his assets among the
creditors. The assets may not be sufficient to pay all, but the
declaration does allow the debtor to partially pay off his debts and
other financial obligations.
Where the Word "Bankruptcy" Came From
The word bankruptcy was coined from the ancient
Latin bancus, meaning "bench" or "table." By adding ruptus ("broken")
as a suffix, bankruptcy thus came to mean what it is now.
In the early Latin days, bankers used to keep
benches in the public places, in markets, and fairs and on them, they
sold their money and wrote their bills of exchange. When a banker
failed in his trade, they would break his bench to show to all that he
is no longer in business. This was how the idea came to be.
Should you file?
There is no doubt that deciding whether or not
you should file for bankruptcy is a tough, agonizing option to make.
Since bankruptcy, though temporary, is nevertheless long-lasting and
far-reaching, it would most certainly affect your future credit, your
relationships, and your self-image.
On the other hand, it could also enhance your
short-term quality of life and possibly keep you from losing your home,
car, and other essentials.
Think of bankruptcy as the financial equivalent
of major surgery. It is the debt managing tool resorted to only at the
last moment when no other remedy is available in the normal course of
finance management.
For this reason, it is significant that you
should cautiously study your options and look at both sides of the coin
before making any final decisions.
Pros
- The moment you
file for bankruptcy, all collection actions by your creditors,
including foreclosures, repossessions, and garnishments, are
automatically stopped.
- Your bankruptcy
lawyer, if you determined to hire one to handle your case, will shield
you from any inquiries made by your creditors.
- Most
states allow your home, car, and other essentials to be exempt. As a
result, bankruptcy means that you will not wind up homeless and unable
to get around.
- Declaring bankruptcy means
that you can get started on rebuilding your credit and your life
sooner. Furthermore, if something unfortunate happens, you are allowed
to amend your existing Chapter 13 plan to accommodate it.
- While student loan debt will remain, filing for bankruptcy will protect you from lenders taking aggressive collection action.
Cons
- You will lose all
your credit cards. However, if you have paid off your credit cards
before filing, there is a good chance you may still keep some of them.
- You may have to give up some of your luxury possessions.
- You
will have some impossibly difficult time getting a mortgage after
recently filing a bankruptcy. It will get easier, though, after about
five years from filing.
- A bankruptcy is a
spot on your credit report and tends to remain there for ten years.
This, of course, makes it hard for you to obtain credit, buy a home or
car, get life insurance, or sometimes get a job.
- Not all debts may be "discharged" in a bankruptcy. (More on this later).
Types of Bankruptcy
You may have heard of someone filing for Chapter 11 or Chapter 7. What do they mean by this?
These are in fact the types of bankruptcy,
so-named after the title of the Chapter of the Federal Bankruptcy Act
in which they appear. There are three common types of bankruptcy
available. Here is a quick rundown of each one:
Chapter 7 Bankruptcy
This is also called as liquidation. In a Chapter
7 bankruptcy case, all the assets and nonexempt properties, if any
exists, of the debtor must be turned over to a trustee for the purpose
of converting them into cash to pay the debtor's creditors.
In return, the debtor receives a Chapter 7
discharge in the form of a court order, releasing the debtor from all
of his or her dischargeable debts. This order also has the effect of
preventing creditors from attempting to collect these dischargeable
debts from the debtor.
Note that there are some debts which cannot be discharged with a Chapter 7 bankruptcy.
Chapter 11 Bankruptcy
This type of bankruptcy is typically used for
business bankruptcies and restructuring. As such, this is not a choice
for individual consumers. Besides being far more complex, it is also
more expensive to pursue.
A Chapter 11 bankruptcy gives businesses the
opportunity to reorganize themselves, restructure debt, and get out
from under particular burdensome leases and contracts. "Business" here
may include a corporation, sole proprietorship, or partnership.
When a corporation files for a Chapter 11
bankruptcy, the stockholders' personal assets are not at risk. Since a
corporation exists separate and apart from its owners, the
stockholders, the only asset the latter stands to lose are the value of
their investment in the company's stock.
Chapter 13 Bankruptcy
This is sometimes referred to as a "mini Chapter
11" because it allows small proprietary business owners and certain
qualified individuals to file for it in order to repay their creditors
but still retain your property.
So how is this different from a Chapter 7
bankruptcy, which likewise allows you to retain certain exempt
properties and assets? Chapter 13 is different in that it enables a
debtor to retain the assets that would otherwise be liquidated by a
Chapter 7 trustee.
In most cases, you can keep your home and your
car under either Chapter 7 or Chapter 13. However, there are certain
instances under Chapter where you would not be able to keep your rental
properties, antique gun collections, etc. Whereas, if you file for a
Chapter 13 bankruptcy, you may be able to keep these "luxurious items"
and submit yourself to a Plan where you can make repayments.
The goal of a Chapter 7 bankruptcy is to
discharge your existing debts so you can get a "fresh start" on your
finances. A Chapter 13, on the other hand, obliges you to repay most or
all of your debts before your slate are wiped clean. It is because of
this – you repay your debts - that you gain a certain advantage over a
Chapter 7.
Make no mistake that bankruptcy is a complex
procedure. There are many intricate details involved in this legal
process that should be taken into consideration before making any
decisions involving bankruptcy. The information above is only basic.
There are still many vital questions that may arise and only your
bankruptcy lawyer who knows more about your particular condition can
authoritatively answer.
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