Bankruptcy is a scary word; we get it. But it happens and can happen to anyone for any reason. But what is bankruptcy, and how do you know if you need to declare it? What do you need to know about the processes, types, and how to avoid them when possible? Let’s take a closer look.
What Are the Types of Bankruptcies?
You’ve probably heard people refer to Chapter 7 or Chapter 11 bankruptcies before, but what do these terms mean? There are three general categories of bankruptcies in U.S. law.
Chapter 7 is individual bankruptcy. It can be used to dispose of unsecured debt and liquidate other assets to pay off outstanding debts.
Chapter 11 is for businesses. The idea is that a non-profitable company can reorganize the business, stay in business, and work toward profitability. They can cut costs, find new ways to increase revenue and work on a debt repayment plan with the courts.
Chapter 13 is for individuals who make too much money to qualify for Chapter 7. It creates processes for individuals and some businesses to pay back debt through installments. Because there is a plan to pay back creditors, individuals and companies can keep their assets.
There are several other bankruptcy laws on the books, but those forms are rarely used. These include Chapters 9, 10, 12, and 15, though most individuals will never need to deal with these categories.
When Do You Need to Declare Bankruptcy?
Getting into debt doesn’t mean bankruptcy is the automatic solution. So when do you know if you need to declare bankruptcy?
The idea behind bankruptcy is to allow people with unmanageable debt, often due to significant expenses or medical bills that are through no fault of their own, to start over financially. However, the process isn’t easy, and results can’t be guaranteed.
Before choosing bankruptcy as your solution, start with credit repair. This process can often get you back on track without the added stress of bankruptcy.
If you decide to declare bankruptcy, you can file on your own. However, the process is highly complex, and one small mistake can make it worse. You should always work with a lawyer who specializes in bankruptcy.
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