Bankruptcy

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Bankruptcy is a legal process through which individuals or other entities who cannot repay debts to creditors may seek relief from some or all of their debts. In most jurisdictions, bankruptcy is imposed by a court order, often initiated by the debtor.

Overview

Bankruptcy offers an individual or business a chance to start fresh by forgiving debts that cannot be paid while offering creditors an opportunity to obtain some measure of repayment based on the individual's or business's assets available for liquidation. In theory, the ability to file for bankruptcy can benefit an overall economy by giving persons and businesses a second chance to gain access to consumer credit and by providing creditors with a measure of debt repayment.

Bankruptcy laws vary from country to country. In the United States, bankruptcy is governed by federal law, collectively referred to as the Bankruptcy Code. The United States Bankruptcy Code includes several chapters, of which Chapters 7, 11, and 13 are the most common forms of bankruptcy.

Types of Bankruptcy

Chapter 7

Chapter 7 of the Bankruptcy Code, also known as "liquidation" bankruptcy, involves the sale of a debtor's non-exempt property and the distribution of the proceeds to creditors. Individuals, partnerships, corporations, and other business entities may file under Chapter 7.

Chapter 11

Chapter 11 bankruptcy, known as "reorganization" bankruptcy, is primarily for commercial enterprises that wish to continue business operations while repaying creditors through a court-approved reorganization plan.

Chapter 13

Chapter 13 bankruptcy is aimed at individuals with a regular income who can pay back a portion of their debts through a repayment plan. This chapter allows individuals to keep their property and pay debts over time, usually three to five years.

Filing for Bankruptcy

The process of filing for bankruptcy begins with submitting a petition to the bankruptcy court. The petition includes detailed information about the debtor's assets, liabilities, income, and expenses. Filing for bankruptcy immediately stops all collection actions against the debtor, including lawsuits, garnishments, and phone calls, through an automatic stay.

Consequences of Bankruptcy

While bankruptcy can provide relief from overwhelming debt, it also has significant consequences. It can severely impact an individual's credit score, making it difficult to obtain credit, buy a home, get life insurance, or sometimes get a job. However, bankruptcy information (both the date of the filing and the later date of discharge) stays on a credit report for up to 10 years and can deter lenders in the short term.

Alternatives to Bankruptcy

Before deciding to file for bankruptcy, individuals may consider alternatives such as debt settlement, debt consolidation, or negotiating with creditors directly. These alternatives may provide debt relief without the severe impacts of bankruptcy.