What is Bankruptcy?

Bankruptcy is a process in which consumers and businesses can either repay or eliminate debt under the protection of federal bankruptcy court.  There are two main types of bankruptcies – reorganization and liquidation. 

Chapter 13 bankruptcy involves reorganization and it’s the most popular choice among consumers.  To qualify for a Chapter 13, the debtor must be earning an income and must be able to demonstrate that they can repay their debts, provided they are able to obtain more manageable terms under the auspices of the bankruptcy court.  The debtor might get 3 to 5 years to pay back debts and the court can authorize lower interest rates to make repayment terms more viable.  When a debtor defaults on a Chapter 13 repayment plan, they might be forced to convert the bankruptcy to a Chapter 7, which is liquidation.
 
Chapter 7 bankruptcy involves liquidating a debtor’s assets to pay back creditors. There are exemptions to which property can be taken and sold off.  Secured debt will most likely be sold off to pay back creditors whereas unsecured debt will most likely be expunged.
 
Because of the automatic stay, where all legal actions from creditors are frozen, bankruptcy might provide temporary relief to a homeowner in a foreclosure situation.  But the reality is that the mortgage is a secured loan, which means that a default on the mortgage will inevitably result in the bank taking the property. 
 
Most debtors file bankruptcy to get a fresh start, free themselves of encumbrances, so they can start over.  There are many rules to filing bankruptcy regarding which debts are covered, eligibility for filing, and what property you can keep.  Bankruptcy is generally a last resort to a debtor’s insolvency crisis.  It is much better to work out deals with creditors directly, if possible, than resort to bankruptcy, which can harm an employment background check and/or future bank loan application for many years into the future.

If you have any further questions about bankruptcy, please contact us.