Bankruptcy Basics: How Does Bankruptcy Work?

Bankruptcy is a very complicated legal proceeding, though its prevalence today sometimes gives the impression otherwise. Though many commercials tout bankruptcy as a way to get a new start and solve all your financial woes, the truth is much more grim.

Bankruptcy will, indeed, offer a solution to some financial problems, but it is not without its drawbacks. Before attempting any type of bankruptcy filing, it’s important to understand how the process works and what the long term repercussions will be.

There are several different types of bankruptcy to suit the many varied situations individuals and companies may find themselves in. Chapter 11 bankruptcy is the best choice for businesses who wish to continue operating. With chapter 11, the company’s debt is reorganized to make it easier to pay off.

The company has 120 days to submit a repayment plan to their creditors. Since the company continues to operate, customers are often unaware that these proceedings are even taking place.

Chapter 13 is very similar to chapter 11 bankruptcy. However, this type of bankruptcy is designed for individuals rather than businesses. The individual works with the creditor to develop a five year repayment plan.

Some of the debt may be discharged as part of the proceedings as well. Farm owners may file this type of bankruptcy as well, under chapter 12.

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Businesses and individuals that are facing debt so severe they cannot pay it off in a reasonable amount of time must take more drastic measures and file chapter 7 bankruptcy.

This type of bankruptcy involves selling all of the debtor’s non-exempt assets to pay off their debt. The debt that remains after these assets have been sold is discharged. When businesses file this type of bankruptcy they must cease operations. For individuals, the immediate repercussions are not always apparent, but the damage is still significant.

While bankruptcy can discharge your debt or reorganize it to make it easier to pay, it’s not a completely beneficial solution. In the immediate term, you’ll be relieved of some of your difficult-to-pay debts. However, if a time comes when you again want to use some credit, you’ll find it very difficult to come by.

Credit cards are nearly impossible to get once you’ve filed for bankruptcy. Those that are available will have very high interest rates and fees. If you do not immediately change your spending habits, these risky credit cards can get you into more trouble than before with their high cost. It takes 10 years for a bankruptcy to be discharged from your credit report.

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Buying a home is difficult after filing bankruptcy as well. Debtors must wait at least one year after filing chapter 13 bankruptcy or two years after filing chapter 7 before they will be able to apply for a home loan.

They must also have at least two credit accounts in good standing that have been obtained since the bankruptcy in order to be considered. As with credit cards, even after meeting these criteria, the interest rates for any loan that can be obtained will be high.

Bankruptcy cannot be easily hidden, either. Employers are able to see these filings on the credit reports of potential employees. A past bankruptcy filing often indicates an individual who has difficulty being responsible with their finances and can make employers hesitant to hire.

If debt is so severe that there are no other viable options, bankruptcy can offer a solution to those willing to deal with the consequences. The best way for individuals to handle bankruptcy is to obtain a reputable lawyer.

Filing can be a very expensive process with average fees tallying up to about $1,700. Debtors must pay both their lawyer and their court fees. For those with extremely limited financial means, a waiver for some of these fees may be available.

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Once filed, the creditors will conduct a 341 meeting to ensure that the debtor is being honest and truthful in his or her filings. If you are filing chapter 13, a plan for repayment of debt will be established. For those filing chapter 7, a review will be conducted to identify assets that can be liquidated to pay off debt.

Creditors then have 60 days after the 341 meeting to file a lawsuit challenging the discharge of debt. If no lawsuits are filed, the bankruptcy will be completed after this 60 day period.

Bankruptcy is not a solution for everyone, but can be approached in dire situations where debt cannot be surmounted in any other way. When the risks and benefits are thoroughly understood, businesses and individuals can determine the best way of handling their financial responsibilities.

 

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