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Bankruptcy
The general theory of Bankruptcy has always been to give consumers a fresh start by relieving them of the majority of their debts and releasing them from any legal liability regarding the debts. Creditors are repaid an amount that the court determines the consumer can afford, and any non exempt assets are released to the courts to be divided amongst the creditors.
Different types of Bankruptcy
There are two types of Bankruptcy: liquidation and reorganization. Chapter 7 is chiefly used for liquidation bankruptcies in which the debtor's assets are sold and distributed to their creditors. All other chapters are reserved for reorganization bankruptcies.
Liquidation bankruptcies involve the debtor's assets that are deemed non exempt by current bankruptcy laws. These non exempt assets are sold off to be used as payment for debts owed to the creditors. The creditors participate in a pro rata (in proportion) distribution of the assets through the liquidation bankruptcy. These types of bankruptcies are typically used by large corporations or organizations.
Reorganization bankruptcies are a little more complex, involving a restructuring of assets and debts owed by the debtor. Debtor's typically initiate these types of bankruptcies to protect or retain their assets and pay their creditors in accordance with their available income.
Different Chapters of Bankruptcy
- Chapter 7 - Liquidation for individuals and businesses
- Chapter 9 - Municipal Bankruptcy
- Chapter 11 - Used primarily by business debtors or individuals with substantial debts or assets
- Chapter 12 - Rehabilitation Bankruptcy for 'family farmers" or "family fishermen"
- Chapter 13 - Rehabilitation Bankruptcy that determines a payment plan for individual debtors with normal means of income (non-business owners)
- Chapter 15 - Reserved for Ancillary and other international cases
The most common bankruptcy filings are Chapters 7 and 13. In a Chapter 7 bankruptcy a debtor surrenders non exempt assets to be distributed between creditors, in exchange for a discharge of the debt. Chapter 13 involves an attempt by the debtor to retain ownership of all their assets, while committing a portion of their future earnings to repaying their creditors. There is typically a time table set in place for which this can be done which is generally between 3-5 years. The amount to be repaid is dependent on the value of the debtor's assets and their current debt to income ratio. When determining which creditors get paid more, secured creditors take priority over non-secured creditors, along with larger debts.
If bankruptcy is the only choice for you, Financial Choice Network recommends you seek a bankruptcy professional to see if you would qualify and to determine which type of bankruptcy would be best for you.
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