What is Bankruptcy?

The dictionary definition of Bankrupt is essentially “broken”. Bankruptcy is a state of “brokenness” that undergoes a financial process.

Bankruptcy is the process whereby an individual who has taken out a loan, or built up credit card debt is judged to be legally insolvent, and whose remaining property is administered for or distributed among their creditors. Bankruptcy is a process. Thus, it is one that can be started by the individual in debt or on their behalf by their creditors.

It’s both a legal term and a legal process. The legal term means that the individual or business is insolvent. The legal process is the process by which the individual’s or business’s assets are evaluated and a considerable and focused effort is made to repay any debtors.

Most commonly is the case when the process of Bankruptcy is filed by the individual or business in debt to creditors when that individual or business cannot repay their debts. Less common is the case when a bankruptcy is filed on behalf of the individuals or businesses creditors. In either case, all of the assets belonging to the debtor are evaluated and can be used to repay a portion, or the whole of the, outstanding debts owed.

There are 4 different types which fall under different chapters of the U.S. Bankruptcy code:

Chapter 7 Bankruptcy is often utilized by individuals or businesses with little to no equity in assets. Any nonexempt belongings like family heirlooms, second homes or vehicles, cash, stocks or bonds are liquidated so that the funds can be used to pay all or some of any outstanding unsecured debt.

Chapter 11 is generally for businesses. The ultimate goal is for the business to become profitable and eventually discharged from Bankruptcy. This process involves reorganizing the business model in such ways as changing pricing structure or business hours so that it might become profitable. Chapter 11 allows businesses to continue conducting its business while it reorganizes without interruption so that it can also work on a debt reduction plan under the court’s supervision.

Chapter 13 is for individuals who make too much money and don’t qualify for Chapter 7 bankruptcy. It allows individuals and businesses to create and utilize a debt repayment structure. Unlike Chapter 7, however, debtors are permitted to keep all of their non-exempt property from liquidation.

Chapter 15 is a recent addition and is used in more complicated bankruptcy cases where the debtors, assets, creditors, and others involved cross international borders. Chapter 15 is filed in the home country of the individual or business in debt.

Not all debts will qualify, and those include:

  • Tax Claims
  • Anything not listed by the debtor in the petition
  • Child Support or alimony payments
  • Personal Injury debt
  • Debts owed to the government.

Ultimately, Bankruptcy has advantages and disadvantages. It can help an individual save their home or business while they work on repaying owed debts. Any kind of bankruptcy will lower your credit, and will stay on your credit report for at least 7 years in the case of Chapter 13, and 10 years for Chapter 7.