Fundamentals of Bankruptcy: Legal Status

Definition of Bankruptcy

Bankruptcy refers to a federal court procedure that helps consumers and businesses get rid of their debts and repay their creditors. In the event that you can demonstrate that you are qualified for it, the liquidation court will ensure you during your bankruptcy proceeding. In most jurisdictions, bankruptcy is imposed by court order, often initiated by the debtor.

Basics of Bankruptcy

Now that the definition of "Bankruptcy" is clear, it's time to move on to its basics. Bankruptcy is of various types but the most common types of consumer bankruptcies fall under two "chapters" of the Bankruptcy Code:

• Chapter 7

Chapter 7 bankruptcy is also known as "liquidation bankruptcy". This type of bankruptcy primarily deals with unsecured debts such as credit card and medical bills. For this situation, the liquidation trustee has the authority to pitch your nonexempt resources to pay back your loan bosses. In Chapter 7 bankruptcy, you don't need to go to the court in most cases. However, you are required to attend a hearing called the meeting of creditors  (also called the 341 hearing).

• Chapter 13

Chapter 13 bankruptcy is also known as "reorganization bankruptcy". In this case, you don't necessarily need to give up all your property to repay your debts. You can opt for a repayment plan in order to pay back some or all of your debts related to mortgage, car loan, etc through a repayment plan. Unlike Chapter 7 bankruptcy, this type of bankruptcy requires you to attend a confirmation hearing in front of the judge in addition to the 341 hearing.

Types Of Bankruptcy

Bankruptcy is mainly categorized as Chapter 7, Chapter 11, Chapter 12 and Chapter 13. Here's a quick summary of all these forms of bankruptcies:

• Chapter 7 Bankruptcy

As mentioned above, Chapter 7 bankruptcy is designed to deal with unsecured debts such as the ones related to credit cards and medical bills. Chapter 7 or "liquidation" is the fastest and most common form of consumer bankruptcy. Here, you may be required to give up some assets, like an expensive car or jewelry. Though this type of bankruptcy forgives most unsecured debts, it doesn't really help with debts such as back taxes, court judgments, alimony and child support, and student loans. Once you file for Chapter 7 bankruptcy, you'll likely find it harder to get a credit for the next 10 years.

• Chapter 11 Bankruptcy

Chapter 11 bankruptcy procedures are ordinarily utilized by battling organizations as an approach to get their issues altogether and pay off their obligations. Furthermore, a few people additionally record for Chapter 11 liquidation when they are not qualified for Chapter 13 insolvency or possess a lot of non-absolved property (like a few homes).

• Chapter 12 Bankruptcy

Chapter 12 bankruptcy is designed for "family farmers" or "family fishermen" with "regular annual income." It is the best option for financially distressed family farmers and fishermen who have failed to pay their debts to their creditors. Under Chapter 12, these people can propose a repayment plan to make installments to creditors over three to five years.

• Chapter 13 Bankruptcy

This type of bankruptcy is also known as "wage earner's plan" because those who file need regular income to qualify. It is a legal process that allows debtors to repay their debts over time while having the opportunity to keep valuable assets, like a home. Here, you cannot get your debts forgiven. You are required to restructure your debt with a three- to a five-year repayment plan.

Who Can File For Bankruptcy

As a matter of fact, anyone can file for bankruptcy. However, every type of bankruptcy calls for certain eligibility criteria that need to be fulfilled in order to file for them. The only thing that matters is that you need to be an honest person who, due to certain reasons, is not able to pay your bills. You cannot file for bankruptcy to defraud your creditors. On the off chance that you have recently petitioned for financial protection, it might influence your alternatives. For instance, in the event that you have as of late recorded a part 7 liquidation, you can't document another section 7 for eight years.

How Bankruptcy Works?

Here a few real-life examples with which bankruptcy can be defined, here two practical examples are mentioned below,

In the year of 2013, a man named Larry Lake was convicted for 14 years in the charges of bankruptcy fraud and tax crimes in Fort Worth, Texas. The court has ordered him to pay $25 million in taxes, interest,and penalties. After he had filed a bankruptcy petition, he was knowingly concealed more than $3 million held in an online trading account and bank account.

Suppose it is a company named ABC broke down on its financial status and now unable to pay the debts that it owes, so the ABC will decide to file bankruptcy after that ABC will present an explanation of the situation to the bankruptcy banks and the lenders in the form of plan of reorganization. A public company should inform its shareholders about the bankruptcy situation.

So, this was an overview of Bankruptcy and its types. Though we didn’t dig into details students pursuing a degree in Finance need to know every little detail about concepts like bankruptcy. This is important for students to have a bright career. For this, institutes require understudies to cover complex syllabus and also work on assignments on topics like “Bankruptcy”. This calls for a solid source of information to gain a better understanding of concepts in order to score better in exams as well as assignments. There are a number of sources that students can refer to. For example, they can take help from these books:

• Book 1:

Basic Bankruptcy Law for Paralegals By David L. Buchbinder (published by Aspen Publishers Online, 2008)

• Book 2:

Bankruptcy By David G. Epstein, Steve H. Nickles, James J. White (published by reprint)

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References:

• (https://bankruptcy.findlaw.com/what-is-bankruptcy/bankruptcy-basics.html)
• (https://www.alllaw.com/articles/nolo/bankruptcy/bankruptcy-questions-and-answers.html)
• (https://www.nerdwallet.com/blog/finance/bankruptcy-chapter-7-or-13/)
• (https://www.uscourts.gov/services-forms/bankruptcy/bankruptcy-basics/chapter-12-bankruptcy-basics)
• (https://www.creditkarma.com/advice/i/what-is-chapter-13-bankruptcy/)