Bankruptcy Basics: What You Need to Know
Declaring bankruptcy is something most people set out to avoid â€” it makes senses that few outside of the legal and financial professions have more than a basic understanding of what the process involves. Indeed, to many the vocabulary alone can be intimidating, which is likely part of the reason why it has such a fearsome reputation.
If youâ€™re worried about your personal finances or the future of your business, demystifying the bankruptcy process is the first step in getting back on track. No matter how bad you may think things have gotten, youâ€™ll likely discover that with the help of a skilled bankruptcy attorney, it is possible to turn things around.
What Is Bankruptcy?
The first step in understanding personal bankruptcy is to understand the different chapters. Bankruptcy is defined in Title 11 of the United States Code, which devotes four chapters to each of the different options available to debtors:
- Chapter 7: Chapter 7 is the most common type of bankruptcy filed for by individuals. Also known as liquidation, Chapter 7 bankruptcy involves selling off a debtorâ€™s assets (although some may be exempt) and basically starting over with a blank slate. A court-appointed trustee oversees the liquidation process and uses the proceeds to refund the creditors as much as they are owed as possible, with the rest of the debt forgiven.
- Chapter 13: Certain debts â€” such as alimony and student loan payments â€” are not eligible for Chapter 7 bankruptcy. Most individuals owing less than a certain amount who have a steady income can apply for Chapter 13 bankruptcy instead. With Chapter 13, a trustee negotiates a settlement with creditors and develops a repayment plan. Under Chapter 13, the debtor doesnâ€™t have to liquidate assets and only has to pay back an agreed-upon portion of the debt.
- Chapter 11: Chapter 11 is another form of reorganization bankruptcy, similar to Chapter 13. It has historically been reserved for corporations, though now individuals owing more than $269,250 in unsecured and $807,750 in secured debt can also file.
- Chapter 12: Chapter 12 is similar to chapters 11 and 13 except its usage is restricted to family farmers and commercial fishermen.
Understanding debt consolidation and the various forms of bankruptcy is a lot easier once youâ€™ve familiarized yourself with a few basic terms:
- Asset: An asset is anything of value owned by debtor, such as real estate, cars and investments.
- Discharge: Debt is considered discharged when it is forgiven or repaid.
- Insolvency: When a person or business is no longer able to satisfy its obligation to creditors, it is said to be insolvent â€” this is typically the precursor to filing for bankruptcy.
- Joint petition: A joint petition is a bankruptcy motion filed by a pair of spouses together.
- Liquidation: Liquidation is the process of selling off a debtorâ€™s assets to raise the money necessary to pay back creditors.
- Secured vs. unsecured debt: Secured debt is any credit agreement backed up by a mortgage or other collateral. Unsecured debt â€” such as credit card debt â€” is not backed by anything other than a promise to repay.
- Trustee: A trustee is a bankruptcy professional assigned by the court to negotiate with creditors and provide other assistance during the process.
Want to understand more about chapter 7 bankruptcy or about your options in general? The bankruptcy attorneys at Rahaim & Saints can help. Contact our office today for more information.