Bankruptcy is the term applicable to individuals who are insolvent and who do surrender either voluntarily or involuntarily their assets for taking care of their debts. A debtor may be considered bankrupt by the Federal Court, at his or her own will or by the creditors. On the declaration of bankruptcy, his or her estate is placed in the control of an official receiver to be distributed. The term “bankrupt” is derived from the Italian word “banca rotta” which means “broken bench”.
Individuals or business entities may file any of the three types of federal bankruptcy codes - Chapter 7, Chapter 11 or Chapter 13. Filing of bankruptcy offers an instant solution in case of a situation which brings in little hope. Debts give rise to even higher debts, with the addition of late fees to principals along with other fees. The debt becomes so heavy that the debtor can no longer manage. Through filing of the right code of bankruptcy, creditors are prohibited from pursuing the debtor and a new plan to handle the situation is created. Bankruptcy remains on the credit history of the debtor for seven years and is likely to bring in increased credit rates for new loans.
Federal bankruptcy codes
Chapter 7: A person, partnership as well as a corporation may file for Chapter 7 bankruptcy. In this case assets are liquidated for the debts to be paid off. For qualifying in Chapter 7 bankruptcy, you should have a current income per month lower than the state median. Chapter 7 may dismiss taxes in majority cases, student loans, or child support. This code of bankruptcy does not file for a repayment plan.
Chapter 11: This code attempts to bring in reorganization of the company for it to stay in business and be able to pay back the debts with time. An entity is not allowed to file Chapter 11 twice during the same period of six months. In order to file the Chapter 11 code of bankruptcy, the debtor should be filing a petition with the bankruptcy court on its own will or by the demand of creditors. A systematic analysis of assets, debts and income is conducted. Assets, which may be future contracts, are taken into account and a schedule of payment is made by the trustee for repaying debts and reorganizing the company.
Chapter 13: This plan aims at dismissal of certain selective debts. It is also called “wage earner’s plan” designed in order to assist individuals to repay the maximum portion of their debts, if not the full amount. When an individual files this plan, he still is able to save the home and retain his asset by adhering to complete a three to five year repayment plan of the debts. Creditors are not allowed to continue with their collection efforts the moment a debtor has filed for this code of bankruptcy.
Bankruptcy should only be declared when you are in absolute dire straits, and there is no other option. Do consult with a bankruptcy attorney to help you deal with the situation in the best possible manner.