If you’re struggling to pay your debts, bankruptcy may be an option. However, it’s not right for everyone.
It can affect your credit score and will remain on your record for years, making it difficult to borrow. It also doesn’t discharge all debts, such as child support and most back taxes.
Chapter 7
The goal of Chapter 7 is to liquidate (sell) nonexempt assets and distribute the proceeds to creditors. It also stops creditors from collecting payments, garnishing wages or liens against property. It is a more rapid and less complicated process than Chapter 13.
The debts discharged in a Chapter 7 bankruptcy are mostly general unsecured debts, which have no collateral and do not fall into categories such as recent income taxes or child and spousal support. There is a limit on how much unsecured debt can be discharged, based on the debtor’s income.
For some borrowers, keeping certain secured debts is more important than discharging them. In those cases, a filer may be able to “reaffirm” the debt, agreeing to pay it even though it could be discharged. A successful Chapter 7 case provides a financial fresh start, eliminating many types of debt and making it easier to manage expenses. It can also help you keep valuable property, such as a home or car.
Chapter 13
For those who qualify based on income (not exceeding the median level for your state) or by passing a means test, Chapter 13 bankruptcy allows debtors to restructure their debt in a repayment plan over a three-to-five year period. If your circumstances change over the course of that time, it may make sense to adjust your payments accordingly.
In a Chapter 13, you retain your property while extending the payment terms of secured debts like mortgages and car loans. During the repayment period, creditors cannot attempt to collect on the debts covered in your bankruptcy case. Depending on your budget, your general unsecured debts may be discharged at the end of your Chapter 13 case. Chapter 13 is also a good choice for those who have recently filed taxes, owed family or child support, or who want to hang onto their assets rather than liquidating them. These are generally considered “non-priority” debts and are treated fairly in Chapter 13. It is common for people to convert from Chapter 7 to Chapter 13 before their cases are completed.
Chapter 11
In some cases a business or individual who is drowning in debt may need to file Chapter 11. This option allows the debtor to continue operating during and after the bankruptcy process. In most cases, the debtor, called a “debtor in possession,” runs
the company, although the court must approve major decisions. This includes selling assets, signing contracts, and making new investments. The court also limits acts that are not part of the company’s ordinary course of business. In the case of fraud, dishonesty, or gross incompetence, the court may appoint a trustee to run the company.
The heart of Chapter 11 is the reorganization plan. This lays out how a debtor intends to use its assets to fulfill its debt obligations. It must designate classes of claims among similarly situated debt- and equity-holders. It must also provide sufficient measures to implement the reorganization plan. Often this requires extensive negotiation with creditors and the court.
Avoiding Bankruptcy
A company may need to go bankrupt as a last resort when it can no longer pay its debts. However, many businesses can avoid bankruptcy by taking steps to address financial problems as soon as they arise. This includes keeping accurate records and having frank conversations with creditors. It also includes implementing a turnaround plan, which can involve a new business strategy and rebranding.
If you’ve received a statutory demand, it’s important to act fast to avoid being made bankrupt. This will give you more time to pay what you owe or come to a payment agreement with your creditor.
Bankruptcy can be a lengthy and expensive process, but it offers some benefits that can help you get back on your feet financially. For example, filing for bankruptcy can stop creditors from harassing you and stops other legal claims such as wage garnishment. It can also protect some of your personal assets. This is something you wouldn’t be able to do with other types of debt relief. For accurate information and legal advice, bankruptcy attorneys in harrisburg pa can assist you with the correct way of handling bankruptcy.
