Bankruptcy is a type of legal proceeding put in place to help individuals or organizations that are unable to pay their debts. In a way, they offer the debtor a fresh start. When you are in a position of financial instability, you can file for bankruptcy voluntarily or the creditors (those you owe) may take matters into their own hands and file it for you.
Types of bankruptcy
Under the American constitution, there are several types of bankruptcy. The most common ones are:
- 1. Chapter 7 bankruptcy
This is the most common type of bankruptcy. It involves the appointment of a trustee who sells your non-exempt property and uses the money to pay off your creditors.
- 2. Chapter 13 bankruptcy
In this case, you and your creditors come up with a plan which involves you repaying a portion of your debt in three to five years. The rest of your debt is then forgiven. If you, however, default on your repayments, your creditors reserve the right to claim repayment of the whole amount owed. This type of bankruptcy is usually popular among those who don’t want to lose any of their property. To be allowed to file for this type of bankruptcy, your debt must not exceed a specified amount.
- 3. Chapter 11 bankruptcy
While the above-mentioned types of bankruptcy are especially suited for individuals, the chapter 11 bankruptcy is suited for businesses. Also known as reorganization bankruptcy, this allows businesses to continue with their everyday functions as they reorganize their assets to enable them to pay their debts.
- 4. Chapter 9 bankruptcy
This is available only for municipalities and involves reorganization of assets.
How to file for bankruptcy
If you are thinking of filing for bankruptcy, the first thing you will have to do is organize and compile all your financial records. You will also be required to attend some credit counseling before you are allowed to file a petition for bankruptcy.
You should also consider getting a bankruptcy lawyer to help you fully understand what is going on.
If you feel like filing for bankruptcy is not the way for you, there are other options. You can decide to go for debt settlement or debt consolidation. Debt settlement involves negotiations which lead to the debtor paying less than what is owed.
On the other hand, debt consolidation involves combining all your debts from several creditors and taking out a single loan to repay them all.