What Is Bankruptcy?
What Is Bankruptcy?
Bankruptcy is a legal process that allows individuals or businesses to obtain relief from their debts when they are unable to pay them. In the United States, bankruptcy is governed by federal law, specifically the Bankruptcy Code. There are several different types of bankruptcy that individuals and businesses can file, each with its own set of rules and procedures.
One of the most common types of bankruptcy for individuals is Chapter 7 bankruptcy, also known as “liquidation” bankruptcy. Under Chapter 7, the debtor’s assets are sold off to pay creditors, and any remaining debts are discharged. In order to qualify for Chapter 7 bankruptcy, the debtor must pass a “means test,” which is designed to ensure that the debtor does not have the financial resources to pay their debts.
Chapter 13 Bankruptcy
Chapter 13 bankruptcy, also known as “reorganization” bankruptcy, is another option for individuals. Under Chapter 13, the debtor proposes a repayment plan to pay off their debts over a period of three to five years. The debtor’s assets are not sold off, but rather are used to pay off the debts as part of the repayment plan. To qualify for Chapter 13 bankruptcy, the debtor must have a regular source of income and their debts must fall within certain limits.
Businesses can also file for bankruptcy, either under Chapter 7 or Chapter 11. Chapter 7 bankruptcy for businesses is similar to Chapter 7 bankruptcy for individuals, in that the business’s assets are sold off to pay creditors and any remaining debts are discharged. Chapter 11 bankruptcy is a reorganization bankruptcy, similar to Chapter 13 for individuals. Under Chapter 11, the business proposes a plan to pay off its debts over a period of time, and the business is able to continue operating while the plan is being implemented.
There are several reasons why an individual or business might file for bankruptcy. These can include a sudden loss of income, high medical bills, a divorce, or the inability to pay off credit card debt. Filing for bankruptcy can provide a fresh start for individuals and businesses, allowing them to get out from under overwhelming debts and start over financially.
However, bankruptcy is not a decision to be taken lightly. It can have serious consequences for an individual’s or business’s credit score and future financial prospects. It is important to carefully consider all of the options before deciding to file for bankruptcy, and to seek the advice of a financial professional or bankruptcy attorney.
In conclusion, bankruptcy is a legal process that allows individuals and businesses to obtain relief from their debts when they are unable to pay them. It can provide a fresh start, but it is not a decision to be taken lightly and should be carefully considered.