Some might think that filing for bankruptcy is taking the easy way out when in fact it is a very lengthy, complicated process. Filing for bankruptcy is usually a last resort for a person or company that is in a dire financial situation.
Types of Bankruptcy
There are several types of bankruptcies, but Chapter 7, Chapter 11, and Chapter 13 are the most common. Chapter 7 involves selling off certain assets in order to pay off a portion of the debt. While companies may file for Chapter 7, this is typically favored by individuals. There are also strict income requirements with Chapter 7.
Chapter 11 is usually reserved for companies since it involves restructuring of the business. The company must come up with a plan to pay off their debts within a certain amount of time. They get to keep their assets, but there are strict requirements pertaining to the amount of debt the company has. Chapter 13 is similar to Chapter 11, except that individuals are also able to file for it.
The Bankruptcy Process
The filing process can take as little as a few months or up to five years. Chapter 7 is usually the quickest since most debts are paid off by liquidating assets. Chapter 13 takes the longest because it involves paying off debts over a period of time.
While a lawyer isn’t required, it is recommended since the process can be quite detailed. There is a filing fee which ranges from a few hundred dollars up to a few thousand. Once bankruptcy has been filed, an individual or company gets an automatic stay which prevents creditors from trying to collect a debt.
Individuals are required to take credit counseling classes prior to filing. They will also need to attend a court meeting with the creditors involved in the bankruptcy case.
What Happens After Bankruptcy
Filing for bankruptcy will result in a lower credit score. The bankruptcy will remain on a credit report for up to ten years. Many debts are discharged following a bankruptcy, except for student loans, tax debts, child support and other specific debts. While filing for bankruptcy will initially have a negative impact on an individual or company’s credit, it typically results in positive changes overall.