What is Bankruptcy?

Bankruptcy, also known as insolvency, is a legal status of a person or an organization that is not able to repay the debts it owes toits creditors. Creditors may opt to file a bankruptcy petition against a business or corporate debtor, known as involuntary bankruptcy, in an effort to recover a portion of what they are owed or initiate a restructuring.
Bankruptcy is most commonly initiated by the debtor (a voluntary bankruptcy that is filed by the insolvent individual or organization). An involuntary bankruptcy petition may not be filed against an individual consumer debtor who is not engaged in business.
It is not a quick solution to financial troubles, but an extreme move to be used once all other options have been exhausted. If you decide to declare bankruptcy, future attempts to obtain credit or financing at affordable rates will be more difficult because you will basically be starting from scratch. However, if you don’t do something about your situation, the debt will just pile up and things will get worse.
If repayment of debts are not feasible, you may want to consider bankruptcy. There is no magic formula that tells you whether bankruptcy is the best choice for you, but hiring an experienced bankruptcy lawyer can a great resource. In general, the older you are, the greater the number of dependents you have, the larger your debt, the smaller your cash reserves or retirement savings, and the greater the amount of non dischargeable debt you have, the more likely that bankruptcy is appropriate for you.
Bankruptcy Chapters:
In Title 11 of the United States Code (the Federal Bankruptcy Code), there are four bankruptcy filings: Chapter 7 – Liquidation, Chapter 11 – Reorganization, Chapter 12 – Adjustment of Debts of a Family Farmer with Regular Annual Income, and Chapter 13 – Adjustment of Debts of an Individual with Regular Income. The filing generally depends on the individual’s financial situation. Reportedly, the most common filing is Chapter 7. Companies, married couples and individuals are allowed to file Chapter 7.
A debtor filing Chapter 7 is essentially starting over from new, hoping for a clean financial slate. Once the filing is underway, an administrator or trustee is appointed to exercise the sale of the debtor’s assets. This does not necessarily mean that everything the person owns is sold. Both federal and state laws allow for certain exemptions, meaning that the debtor might get to keep some property, such as his or her primary residence or personal items like clothing. Once the debtor’s assets are liquidated, the trustee pays certain creditors a portion of the money raised. Obviously, not all of the creditors receive money from the proceeds, so many of those financial obligations are forgiven, or discharged under bankruptcy. Once someone has filed for bankruptcy under Chapter 7, he or she cannot file again for seven years, and debts that were not forgiven in a previous filing will not be discharged in the next filing.
It is important to note that there are certain debts for which the debtor will receive no forgiveness. Alimony, child support, and taxes are not discharged under any bankruptcy filing, and student loans are seldom discharged. So, if a lot of your debt falls into these categories, you might be better off filing Chapter 13.
Chapter 12 and Chapter 13 are basically the same filing, except that Chapter 12 is for family farmers and Chapter 13 is for other individuals. As long as you have a steady, reliable income, less than $269,250 in unsecured debt and less than $807,750 in secured debt, you can file Chapter 13. Once the filing is made, the debtor is assigned a trustee. The debtor and trustee develop a proposal for a repayment plan. The court decides whether to accept or alter the plan or dictate another repayment plan altogether. Once the plan is decided upon, it can last anywhere from three to five years.
There are a couple of reasons someone would opt to file under Chapter 12 or 13 instead of Chapter 7. Under Chapter 12 and 13 filings, debtors do not have to liquidate their assets; they actually get to keep everything, not just the items that meet the legal exemption. Also, in most Chapter 12 and 13 cases, the debtor is repaying only a percentage of what he/she actually owes, sometimes as little as 30 cents to 50 cents on the dollar.
Chapter 11 bankruptcy is very similar to Chapter 13. The main difference is that there is no limit regarding the amount of money owed by the debtor. Originally only intended for large corporations, individuals can now file Chapter 11 as well.
Filing for bankruptcy is not to be taken lightly. It affects your credit rating for many years. The decision to file is best made under the counsel of a financial planner and/or a legal representative.
Alternative Options to Bankruptcy:
How to avoid bankruptcy is a great question to ask. You should consider alternatives before you arrive at that final choice to file bankruptcy: You could lose almost everything of value you own, so try to sell the items you no longer use in order to pay off your current debts. This may include moving to a smaller house, selling any recreational vehicles, downsizing your cars. Your house is most likely packed with things that others would pay money to take off your hands. Try having a yard sale with all of these items.
There is the option of working extra hours at your current job (if possible) or even finding additional work elsewhere. If your partner or spouse isn’t currently employed, it may be time for them to find a source of income. You could also try persuading your boss for a raise or promotion.
By reorganizing your debt via debt consolidation or negotiation, you won’t eliminate the debt without paying it off, but may be able to reach a deal with debt collectors to lower the amount you owe, or to be put on an affordable payment plan. It can also help to know related laws, as they differ by geographic location. An attorney is always a good resource and many of them offer a free initial consultation.
Lastly, you should communicate your options by writing a letter to everyone you owe money to and letting them know of your financial status. Be sure to make it clear if you are having difficulties finding a way to repay your debts, and could possibly be filing for bankruptcy. Most creditors would rather have you pay back a fraction of what you owe than not be able to get money from you once bankruptcy has been declared. This is where an experienced bankruptcy attorney can help.
If you need a good Encino Attorney, State and Federal Lawyers Group can help you get out of debt and navigate difficult financial times. If you have outstanding debts, they can help you gain control and move forward with confidence knowing that you don’t have to lose your home just because housing values plummeted.
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