Understanding Bankruptcy

bankruptcy lawyerIn 2014, there were 936,795 cases of bankruptcy, a significant drop from the previous year, and a significant increase from the reported filings in 1980. Many people misinterpret the meaning of bankruptcy and associate it with being “broke.” Bankruptcy is meant to shield the filer from creditors while they follow a repayment plan, and comes in many forms that a bankruptcy lawyer can help you understand.

What is Bankruptcy?

Bankruptcy is allowed by federal law, enabling debtors to shield themselves from their creditors by seeking relief from a federal bankruptcy court. The bankruptcy court helps a debtor eliminate their debt or repay their debt under fresh terms based on their financial situation.

Although bankruptcy is meant to ultimately eliminate debt, filing holds consequences that have a negative impact on the debtor, particularly in regard to their credit score. Bankruptcy can stay on one's credit report for up to 10 years. During this period, the bankrupt person will have great difficulty obtaining credit at reasonable rates and he or she may even have difficulty securing jobs. Because of the enduring effects of filing for bankruptcy, experts advise individuals and businesses to resort to it only when their debts are in excess of $15,000.

A bankruptcy lawyer may advise you against filing bankruptcy to avoid certain obligations. There are many debts and responsibilities that cannot be discharged by a declaration of bankruptcy. These financial obligations include:

Child Support
Alimony
Debts arising after declaring bankruptcy
Loans acquired fraudulently
Debts arising from personal injury caused by driving while intoxicated
Debts incurred six months before filing bankruptcy
Some taxes and student loans

A Case Study Example of Bankruptcy

Mr. S, a builder, has a monthly income of $2800. He lives with his girlfriend in a small apartment which he rents at $800 per month. In the course of three years, Mr. S has had difficulty securing a steady job and has accumulated a debt amounting to $20,000 from an assortment of different creditors. The best solution for Mr. S is to file for bankruptcy because he has no surplus income or any other realistic means to clear his debt. Furthermore, his bankruptcy claim does not affect gaining employment in his chosen profession (unlike other jobs that require a credit check as a condition of employment). Since his home is rented, there is no reasonable way of reducing the cost of rent.

Bankruptcy Options

Chapter 7 Bankruptcy

70% of non-business bankruptcies fall under this category. A bankruptcy lawyer will recommend Chapter 7 bankruptcy to help one discharge all their debts and relinquish liability for repaying them. In such cases, you may be allowed to remain with some of your assets but others may be liquidated by a bankruptcy appointed trustee. The proceeds from the liquidated assets are used for paying for administrative fees, repaying one's creditors, and paying the bankruptcy trustee.

Chapter 9 Bankruptcy

This form of bankruptcy is filed by municipalities like towns or cities and helps them reorganize their institutions.

Chapter 11 Bankruptcy

This form of bankruptcy is similar to Chapter 13 in the sense that it involves a repayment plan. It is commonly used by large organizations.

Chapter 12

This form of bankruptcy is limited to family fishermen or farmers.

Chapter 13 Bankruptcy

30% of non-business bankruptcies fall under this category. Chapter 13 bankruptcy involves paying a share of your debts so that the pending amount is forgiven. This option is best suited for those who don't want to relinquish their property or don't qualify to file for a Chapter 7 bankruptcy. Under this form of bankruptcy, debtors are required to formulate a 3-5 year repayment timetable. After completing the plan, one's debts will be erased.

Chapter 15

This form of bankruptcy applies to cross border cases where the debtor is in possession of assets in the U.S. and also in a foreign country.

If you are facing unpaid bills, getting further in debt and can’t get ahead of your bills, you would do well to consult with a bankruptcy lawyer to find out what your best options are.