Bankruptcy may be an option for people who cannot pay their debts.
Bankruptcy is the process in which a person legally declares himself or his company unable to pay outstanding debts. Depending on the type of claim, the person meets with a judge to determine a payment schedule or to obtain the legal bankruptcy of most, if not all, debts. Companies can also declare bankruptcy, which means they will be closed or will continue to operate with reduced payments to debtors. Each country has its own designations, but this explanation will focus on the most common types in the United States.
Student loans cannot be canceled in the event of bankruptcy.
The bankruptcy of the individual or married couple or spouse takes three forms, called “chapters”. Chapter 7 is the most common form filed by spouses or individuals. Chapter 12 is restricted to people who are family farmers or fishermen. Individuals or couples can also have Chapter 13, but this is rare.
For businesses, the two common forms of bankruptcy used are Chapter 7 and Chapter 11. Less commonly, an individual or company can file a Chapter 15 lawsuit, which involves settling international debts. If a state agency such as a city must declare bankruptcy, they file Chapter 9, which is also called municipal bankruptcy.
Individual bankruptcy stays on a credit report for 10 years, which can make getting credit difficult.
Chapter 7 tends to be used by individuals or companies who want a complete blank slate. A company that files Chapter 7 tends to close its doors as a result. For the individual, this modality means that the judiciary declares him incapable of paying the debts incurred and almost all debts are then null and void. Certain federal debts, such as student loans, are not affected by filing for bankruptcy.
Refinancing is used to make paying for homes easier, but it can also be applied to cars, boats, and other assets.
In general, you should be able to prove that your income is insufficient to pay off your debts. A person filing Chapter 7 is at risk of losing most assets with this type of bankruptcy. A primary vehicle or home will not be lost under this form unless the person has a loan to purchase an automobile and cannot make payments on the vehicle, or a home loan, which they cannot repay.
Bankruptcy is usually done on larger debts and loans.
All assets must be declared when filing Chapter 7. Other assets such as second homes, collectibles, and additional vehicles are liquidated to pay off debt. Many of those who file Chapter 7 do so because they have so little to lose. After a judge approves the order, virtually all debts, such as those owed to credit card companies and doctors or hospitals, are cleared and the person is given a clean slate.
Personal bankruptcy can give a person protection from debt collectors, but also force him to lose control of his assets.
Chapter 13 bankruptcy is filed by individuals who own a large amount of property or assets, but find that their income cannot cover the exorbitant payments of debt owed. In this way, debt is restructured and, in some cases, reduced so that people keep their assets but have reasonable payments they can make to debtors. Generally, court-ordered payments must be made on time and on a regular basis in order to prevent assets from being seized.
Companies fill out a similar form called Chapter 11. Part or part of the company’s debt can be liquidated and payment plans restructured. Chapter 11 aims to reorganize the debt so the business can continue operating.
Chapter 7 is the most common bankruptcy among spouses, although couples can also file Chapter 13.
All forms are an expensive means of getting debt relief. Both individuals and businesses experience a reduction in their credit scores after bankruptcy. Individual bankruptcy stays on the credit report for 10 years, which can make approval for new cars, homes, or credit cards expensive and difficult.