Bankruptcy serves the purpose of resolving the issue of insolvency. In legal terms, the latter means that an entity owes more money than they have in assets.
When an individual or business cannot afford to repay its debts, a fresh financial start may be provided by filing for bankruptcy.
There are numerous types of bankruptcies and it’s key to know what it takes. Not everyone qualifies.
This generally involves the sale of assets. Typical for individuals rather than organisations, it is simple and relatively quick. In this process, non-exempt property is submitted in order to be liquidated. A means test is conducted beforehand.
This is meant to be a last resort, once you have tried other options first.
You should only opt for this when you know your level of assets and that selling them will be enough to settle debts.
When you file, then a plan is created to pay at least some of what is owed. Payments are made to a trustee and the entities you owe could have a say in the plan. The judge has the final say however. As with a Chapter 7 filing, credit counselling beforehand is a prerequisite.
This is ideal for businesses because it enables them to continue operating throughout. An organisation that files for this option receives an automatic stay, so litigation can’t proceed. A repayment plan can be created. It’s also important to keep in mind that the restructuring of the business may end up in the company being owned by creditors.
Other types of bankruptcies include Chapters 9, 12 and 15.
Before making any decisions it’s vital that you do your research and consider alternatives first.