Bankruptcy in the USA

Steps to File for Bankruptcy

For an individual who is unable to meet their debt obligations, bankruptcy may be inevitable. However it should not be your first option, though it may seem easy and tempting to do so.

Consult with a Bankruptcy Debt Relief Agency

It is imperative that you first consult with a bankruptcy debt relief agency in order to evaluate your full financial situation. You might have other options available to you for debt relief, such as debt consolidation. Once you have exhausted all other options, or if your debts are so overwhelming, only then should you consider filing for bankruptcy.

Bankruptcy for Companies

1. Chapter 12 – Adjustment of Debts of a Family Farmer or Fisherman with Regular Annual Income: This chapter of bankruptcy for debt relief involves the debtor providing a plan that includes how the business will pay of debts through a schedule. Generally, these schedules may not last more than 3 years, however a judge can extend the time to 5 years if the circumstances warrant it. The bankruptcy trustee will help disburse payments to creditors in accordance with the court-approved plan. This allows the business to continue operating while making payments.
2. Chapter 9 – Adjustment of Debts of a Municipality: This particular chapter for bankruptcy debts is specific to cities, towns, municipalities, etc. This type of filing for bankruptcy and debt allows the business to reorganize. With the court’s approval, the debtor is required to fulfill only a portion of its bankruptcy debt while the rest of the balance is stricken from the books.
3. Chapter 15 – Ancillary and Other Cross-Border Cases: This type of bankruptcy debt code specifically deals with insolvency and bankruptcy debts that happen outside of the U.S. The objective is to apply the bankruptcy laws of the United States and those of foreign countries as needed. This allows the business to take advantage of specific bankruptcy debt relief laws.

Bankruptcy for Individuals

1. Chapter 7 – Liquidation: The goal of this bankruptcy debt chapter is to liquidate all of the individual’s assets to pay off their bankruptcy debts. The court will assign a bankruptcy trustee to manage the liquidation of available assets. This first creditors in line are secured creditors where an asset was used as collateral in the loan agreement, such as a house or vehicle. However, most people who file for bankruptcy for debt relief don’t have any assets that can be liquidated since there are assets that are exempt from liquidation, such as pensions, tools of the debtor’s trade, vehicles up to a certain value, etc. When this is the case, the court will discharge any bankruptcy debts that are considered dischargeable.
2. Chapter 13 – Adjustment of Debts of an Individual with Regular Income: Any individual who is not permitted to file under Chapter 7 bankruptcy debt will file under Chapter 13 bankruptcy debt. If you have a regular source of income and it falls within the middle and high income bracket, your unsecured debts will not be discharged immediately. This will allow you to keep some of your valuable assets that would have been liquidated under a Chapter 7 bankruptcy for debt relief. Instead, the debtor develops a detailed plan to repay creditors during a 3 to 5 year period. The plan must be approved by the court judge and depends on whether you can prove that you can afford to meet your payment obligations. However, if your total bankruptcy debt burden is too high, you will not be eligible. Your secured debts may not be more than $1,149,525 and your unsecured debts may not exceed $383,175. There are certain debts that are considered a priority and must be paid in full, such as child support, alimony, wages owed to employees and certain tax obligations. Your plan must include regular payments on your secured debts and that you have some disposable income after making those payments that can go toward paying your unsecured debts. While you won’t be required to pay all of your unsecured debts in full, you must show you are able to repay them with remaining income.

What are the Consequences of Bankruptcy

Bankruptcy and debt have a long history together. However, as mentioned above, filing for bankruptcy does have negative consequences. In many cases, the negative effects of filing for bankruptcy make it not worthwhile. It cause significant and long-term damage to your credit. You also lose all of your credit cards. Chapter 7 is also difficult to qualify for.

Where Bankruptcy Doesn’t Help

Filing for bankruptcy for debt relief won’t erase all of your debts. In many cases, you will be responsible for all secured debts, and collateral will be collected. However depending on your personal situation and which chapter of bankruptcy you file under, you will most likely have a portion of your unsecured debts discharged, if not all of them.

And as stated previously, Chapter 7 liquidation bankruptcy is hard to qualify for. This is because many assets are considered exempt from liquidation. Most people do not own assets that are eligible for liquidation, such as a second home or vacation home.

It is also possible to have too much debt to qualify for bankruptcy debt. To qualify for Chapter 13 bankruptcy, your secured debts may not be more than $1,149,525 and your unsecured debts may not exceed $383,175.

Because of these difficulties, it is important to consult with a bankruptcy relief agency to analyze your unique financial situation.