When businesses go under, the word “bankruptcy” gets thrown around more in regular conversation. I decided to do some research, and it turns out that filing for bankruptcy isn’t as easy as just saying, “I declare bankruptcy!” There’s actually a lot more involved.
A person may have to file for bankruptcy if they find it impossible to pay back the debts they owe to creditors. There are many reasons why someone might find themselves in this situation, including prolonged unemployment, a nasty divorce settlement, or insurmountable medical costs. No one plans on declaring bankruptcy, but sometimes it’s necessary for people who are drowning in debt.
Types of Bankruptcy
When an individual is declaring bankruptcy, there is more than one way to go about it. These are all the different ways someone could file for individual bankruptcy:
- Chapter 7, “liquidation bankruptcy”
- Chapter 11, reorganization of assets, which is also used for businesses
- Chapter 12, for family farmers
- Chapter 13, a repayment plan
- Chapter 15, which is only used in foreign cases
However, the most common types of an individual bankruptcy are Chapter 13 and Chapter 7. Chapter 13 is a “repayment plan” in which the person who is filing has to pay at least part of their debts back to their creditors. It’s harder to file for this kind of bankruptcy than it is to file for Chapter 7 bankruptcy.
Chapter 7 bankruptcy is what is known as “liquidation bankruptcy,” and someone declaring Chapter 7 bankruptcy may have a no-asset or an asset case. A no-asset case is when the person who owes the debts keeps all of their property. In an asset case, the debtor would have to relinquish some of their “non-exempt” assets to help pay back the debts. Non-exempt assets are assets that are not necessary for living and working. Non-exempt assets might be things like expensive collections, musical instruments, family heirlooms, and second cars or homes. Debtors should probably work with a bankruptcy lawyer to make sure that they’re covering all their bases when it comes to keeping their assets.
According to bankruptcy lawyer Erin Shank, Chapter 7 bankruptcies also have special provisions for military personnel and veterans. Under these additions to the Bankruptcy Code that were passed in 2005, people who have served in the military now have an easier time declaring bankruptcy than before.
I also learned that although many people think tax debt doesn’t apply to bankruptcy cases, it actually can! Some federal tax debt can be minimized or forgiven when you file for bankruptcy, but you need the right lawyer to make sure that you’re getting everything out of your case.
Declaring bankruptcy can be really beneficial and even life-saving to people who have too many debts. With the help of the right lawyer – someone who has their clients’ best interests at heart – filing for bankruptcy seems like it can be a really good option.