Bankruptcy is often a very cruel sounding word and one that people would like to avoid. Whether it is an individual with a bad credit history declaring bankruptcy or alternatively a person declaring it on behalf of their businesses there are a number of different things that people need to be aware of regarding bankruptcy.
Many people that apply for credit cards aren’t really thinking about bankruptcy and indeed only a person that is really diligent and looking at all of the angles would even consider bankruptcy as a possibility down the road and even they would only be doing so as motivation to keep their diligence in their handling of their finances.
The point is that bankruptcy is not something that many people think about on a regular basis. Only people that have really bad credit history and have been pushed to the brink of bankruptcy start thinking about it and because of that there are a number of people that are poorly informed when it comes to issues regarding bankruptcy.
When you are on the verge of declaring bankruptcy then you can really be in an emotional state that is not conducive to a lot of rational thought. Being bankrupt and knowing that virtually nobody trusts you with money can be a very lonely as well as a very paralyzing feeling.
This article will attempt to answer some of the most frequently asked questions about bankruptcy in order to at least give you a little bit of knowledge that you can use to help guide your way through this difficult period in your life.
What is bankruptcy?
This is different depending on the different chapters of bankruptcy that are available. For the purposes of this article we will discuss things using the United States bankruptcy code which has actually undergone some revisions in recent times in order to make some changes to the way that people were going about getting their bankruptcies handled.
A person with bad credit history has a number of different options when it comes to bankruptcy and in particular they have three different kinds of bankruptcies to choose from. They can get a chapter 7 bankruptcy, a chapter 11 bankruptcy or a chapter 13 bankruptcy. Those chapter numbers in front of the words correspond to the specific chapters of the United States bankruptcy code that deal with the actual events surrounding each specific type of bankruptcy.
What is a chapter 7 bankruptcy?
This is perhaps the bankruptcy that most people with a bad credit history consider first as well as the type of bankruptcy most people in general are familiar with. There are a number of different things that go on in this bankruptcy but in terms of popularization of bankruptcy most people are probably familiar with the chapter 7 version of bankruptcy more so than any of the other two kinds.
If you have a very bad credit history and have come to the point where you feel as though you simply can not make payments anymore then it might be time for you to attempt to secure a chapter 7 bankruptcy. Under the terms of a chapter 7 bankruptcy you would give all of your possessions over to a chapter 7 trustee.
The trustee would then liquidate the possessions (i.e. turn them into cash) and then distribute that cash amongst your creditors in a way that proportionally mimics the amount of money that you owed each individual creditor. The idea behind this bankruptcy is essentially that it wipes the slate clean and that you start again with a new leaf.
This is not entirely true however because the chapter 7 bankruptcy will stay on your credit report for as much as a decade and therefore you will have poor credit history for a very long time after your successful declaration of a chapter 7 bankruptcy.
That is generally how the chapter 7 bankruptcy works on a federal level but there are also variations on it within the different states and regions of the country. Many different states and regions will let you keep certain properties in order to make things easier on you with your new leaf. Additionally, just having a bad credit history is not enough to secure a chapter 7 bankruptcy.
You need to prove that you do not have the ability to pay your debts. If a judge discovers that you have enough money after reasonable deductions for living expenses to make all of your monthly payments then your chances of being granted a bankruptcy under chapter 7 of the United States bankruptcy code are very slim indeed.
What is a Chapter 11 Bankruptcy?
A chapter 11 bankruptcy can be used by both individuals and by corporations but it is mostly used by businesses. People that are interested in a type of bankruptcy that is similar usually opt for a chapter 13 bankruptcy which is explained in the next section.
Just like individuals, companies can have bad credit history as well. Whether bad credit, no credit or good credit (although the last one is unlikely) there are businesses that have problems discharging their debts.
A simple look up of court records will indicate that most small businesses are in a very large amount of debt and when you consider the large amount of debt that they have it becomes easy to see why many businesses would need relief. There are many different ways for businesses to get relief but for the businesses that have debts that are simply too much to handle the only way out might be through the use of a chapter 11 bankruptcy.
Under the terms of a chapter 11 bankruptcy the individual or corporation with bad credit history and piling debts must come into court and negotiate a repayment plan. This repayment plan will be decided on ultimately by the judge based on information provided by the individual or company as well as by the creditors of the bankruptcy seeker.
The seeker then agrees to go through with the repayment plan and once they have fulfilled the obligations of the repayment plan the rest of their debt is discharged. The chapter 11 bankruptcy also has the ability to stay on a person’s credit report for up to ten years so people that go for this type of bankruptcy will also have a prolonged bad credit history.
What is a chapter 13 bankruptcy?
People exist all over the world that have bad credit. No credit provider wants to let these people go but at a certain point that person will get to the point where they just can’t take it anymore. These people usually try for a chapter 7 bankruptcy to begin with and if they are not granted it then they go for the chapter 13 option. Under a chapter 13 bankruptcy the same process as with a chapter 11 bankruptcy is used and the end result is also going to be reasonably similar.
What are the changes that have been made to the code?
There are many different changes that have been made to the United States bankruptcy code in the most recent bill that addressed it but the most important one is the fact that it has been made a lot more difficult to get a chapter 7 bankruptcy in today’s United States.
This serves to have a number of advantages and disadvantages. To the person that has a genuine problem and needs a fresh start they could find out that their bad credit history gets worse, they are unable to make payments and even still they are denied a chapter 7 bankruptcy. In other words, the new code can be very harsh to people that are genuinely looking for relief.
On the other hand, small businesses that might need to get their money paid back in order to survive financially will benefit from the difficulty in obtaining a chapter 7 because now their debtors are going to have to pay them eventually. There are good points and bad points to the changes that have been made to the bankruptcy code.
How can I protect myself against bankruptcy?
The same way that you protect yourself from getting into a bad credit history situation. Make sure that you are diligent with all of your credit usage and make sure that you do not incur any debt that you can not afford to pay back. It really is not difficult avoiding bankruptcy and indeed there is any number of things that you can do in order to make sure that your credit is strong and the possibility of bankruptcy is so remote that it is not even worth discussing.