What is bankruptcy ?
Bankruptcy is a term used when a person or company declares himself or his business incapable of paying outstanding debts. The types of bankruptcies vary, so a person could meet with a judge to determine a realistic payment schedule or file a legal bankruptcy to discharge most (or sometimes, all) of the debts. When businesses declare bankruptcy, it could either close down or continue to run with a reduced payment scheme to debtors.
Bankruptcy types vary from one country to the next. In the United States, bankruptcy for individuals or couples comes in three types, which are classified as ‘chapters’. The most common type of bankruptcy filed is a ‘Chapter 7’ wherein individuals and spouses are included. Chapter 13 is rarely filed, but it also falls under bankrupt individuals and married couples. Chapter 12 is only filed by fishermen and family farmers.
Bankruptcy for businesses can either be filed as a Chapter 7 or Chapter 11. The rarest form of bankruptcy is a Chapter 15, wherein an individual or business clears his or his business’ international debts. If a government-run agency or department declares bankruptcy, a Chapter 9 bankruptcy should be filed.
For individuals and businesses that want a clean slate, a Chapter 7 bankruptcy could void all debts, depending on a court’s decision. However, businesses filing for this kind of bankruptcy always have to shut down their operations for good. In addition, some federal debts, such as salary or student loans, cannot be filed as part of bankruptcy.
Not everyone can file for bankruptcy; a person or business should prove insufficient income that makes them unable to meet debts. Anyone filing a Chapter 7 has the most risk of losing assets since they have little left to lose. If they have other assets like vehicles, second houses and collectibles, which can be liquidated to pay debts, they would not be given a clean slate. However, if they would eventually lose a primary residence or vehicle through this bankruptcy, a judge may approve of the filing and given a clean slating, removing all debts such as those owed to doctors, hospitals or credit card companies.
Those with multiple assets, but their incomes cannot cover other payments, such as second mortgages, can file a Chapter 13 bankruptcy. In these cases, the debt is restructured or reduced to enable the person or business to keep the assets, but make regular and pre-determined court-ordered payments, which should be made on time to prevent the assets from being seized. A Chapter 13 bankruptcy follows the same principle, but is used by businesses so they could continue operations without closing down.
Anyone approved of a bankruptcy filing, may it be an individual or a business, would reduce their credit score. It would take another 10 years to be approved for new homes, cars and even credit cards once you are deemed bankrupt.
