How bankruptcy works for individuals?
Bankruptcy is a word that puts fear into a lot American hearts. It stirs emotions that equate to sadness, regret, and uncertainty. Knowing about individual bankruptcy and the correct steps to take if confronted with it can pay dividends if you are ever met with bankruptcy.
To start, it is important to note that there is a difference between bankruptcy for a business and bankruptcy for an individual. Individual bankruptcy occurs when an individual is upside down with their finances. This usually occurs when there is an excessive amount of debt and not enough income to even chip away at the debt.
Filing for individual bankruptcy can wipe an individual’s slate clean. It is really a way of hitting a financial reset button for one’s life. However, there may be repercussions for filing. A repercussion could be that your credit score will be affected based on the filing. Having the generalities of bankruptcy discussed above, we can now dive into the two most common forms of individual bankruptcy, which are Chapter 7 and Chapter 13.
Chapter 7 bankruptcy is a liquidation of an individual’s assets. All non-exempt assets will be sold in order to satisfy the creditors. Starting this process, involves the debtor filing a petition with the bankruptcy court in their jurisdiction. The individual has to also file additional information with the court, which usually involves (1) schedules of assets and liabilities; (2) a schedule of current income and expenditures; (3) a statement of financial affairs; and (4) a schedule of executory contracts and unexpired leases. Fed. R. Bankr. P. 1007(b). Filing these documents will allow the court to fully analyze the individual’s financial situation.
Also, Chapter 7 will release the individual debtor from most obligations to creditors. It will also prevent creditors from seeking any collections actions against the individual. It truly is a way for the debtor to get back on their feet and begin a new financial path. Under Chapter 7, most debts will be discharged. However, there are a select few that the courts have deemed to not be a dischargeable debt, such as student loans, alimony, and child support.
The second option for an individual is usually Chapter 13. It differs from Chapter 7 because it creates a repayment plan so that the debtor can repay their debts. It is not a liquidation like Chapter 7.
Here, a repayment plan is established that will allow a debtor to pay back creditors in a three to five year period. During this period the law will not allow creditors to seek collection actions. This allows the debtor to be undisturbed while they are attempting to meet creditor obligations. Chapter 13 affords debtors opportunities that they would not receive under other chapters, especially Chapter 7. Because Chapter 13 is not a liquidation, it allows the debtor to save certain assets such as a house. That is why filing under this chapter could be a wise decision if you have the means to make the payments under the repayment plan. It will prevent liquidation of assets that are essential and important to your life.
Any individual can file under Chapter 13. However, there are certain requirements financially that must be met to file under Chapter 13. These involve unsecured and secured debts to be in certain monetary ranges. The filing process under this chapter is very similar to filing under Chapter 7. It requires the petition to the court within the correct jurisdiction as well as the same list of items that must follow the petition.
A payment plan must be established and then approved by the court system. This plan will outline the time period that the debtor will make the payments. These payments will be made to a trustee and then paid to the creditors that need debts satisfied.
Either of the above Chapters will be an option for an individual that is seeking to start over or maybe just needs some financial assistance. There are major differences between the two filings. There are pros and cons to each, which is why it is important to evaluate both choices before filing a petition.