More often than we know, individuals and businesses file for bankruptcy because of many reasons. It is always a hard pill to swallow even for the owners and the creditors.
However, bankruptcy, most times, is the only way forward. It mostly offers businesses a chance to recoup and begin again on a clean slate. Now, this depends on the reasons for filing it and the plans the business has put in place for the way forward.
Therefore, before you venture into a business, especially one that will have people commit their monies to you or lend out their monies for your business, you must be fully informed about bankruptcy and how everything about it works.
What is Bankruptcy?
Bankruptcy is a legal order that allows a business that has run into debts and is no longer able to pay back an opportunity to go debt-free for a while. It somehow goes south for the creditors but it favors the business by making their debts go away. However, creditors will finally recover their money because the assets of the business will go for liquidation.
By the way, liquidation happens when a company’s assets are distributed or sold to regain the money to pay a company’s debtors.
So, bankruptcy comes as a breather to a company. It helps them take a break from the pressure of paying the debts the company has incurred over time and can’t pay back. While plans will be underway for company assets liquidation in order to settle the creditors.
More so, there are different types of bankruptcy. They go by chapters, according to the bankruptcy code in the United States.
Types of Bankruptcy
Although bankruptcy relieves businesses from the pressures of debts. It hands them a new lifeline to start on a fresh note. Still, the business would have to declare its assets as a way to balance out its debts. Meanwhile, there are different types of it that are known in the United States.
This includes chapter 7 0f the bankruptcy code all through chapter 15.
Chapter 7
Bankruptcy code chapter 7 is the type that involves the process of personal or business assets liquidation.
For instance, once a business files for this type of bankruptcy, a bankruptcy trustee will be assigned over the process of assets liquidation. It has to go through this process because that is the only means that can provide claimant balance. After the liquidation, the proceeds will be used to settle the lenders.
Furthermore, in the event that the individual or business does not have tangible assets to sell, they can easily forgo their unsecured debts. These unsecured debts refer to any loan that the lender gave out without any collateral.
So, it means that once a business files for this type of bankruptcy, it can easily let go of its unsecured debts. But this happens in the event that the business or individual has no assets to liquidate. Both from the business or from personally owned assets. However, there are rules that guide filing for chapter 7 type of bankruptcy.
Chapter 9
First, chapter 9 does not have any rule about liquidation. Again, it is not meant for individuals or companies. This type is for larger organizations like towns, cities, and administrative districts. As such, those can not be asked to liquidate assets.
Chapter 10
This type of bankruptcy was struck out of use for a period of time now. However, this type will have to put up an investigation and decide if a business that filed for chapter 10 is worthy of reorganization or liquidation and closure.
Chapter 11
Basically, chapter 11 of the bankruptcy code helps a business or company to reorganize and still stay in business. Chapter 11 gives the business room to keep doing their business while they map out a specific plan for the repayments of their debts.
You see, lots of companies and businesses usually file for this chapter 11 because of the opportunity it gives them to continue working or staying in business. So, instead of the pressure to repay their debts, creditors will lay back for some time, while the business or company continues business and reorganizes to pay them. Besides, all the reorganizing and planning while doing business must be in the best interest of the creditors. Again, the planning and all the company’s moves must be under the watchful eyes of the law court.
Chapter 12
When it comes to business in farming and fishery, this is where you can file for bankruptcy chapter 12. it allows the farmers and fishery business owners to still be in business while they make plans to repay their debts. Although the repayment plans can stretch between 2 to 5 years.
Chapter 13
Chapter 13 type will be obliged by the court to make a comprehensive list of all the debtors. Then, the business will speak on the monthly debt repayment plan they can abide by. Also, the debtors will stop having a direct one on one with the business and resumes communication through the court-assigned trustee. Chapter 13 has rules and not all individuals or businesses are eligible to file for this code.
Chapter 15
This came into existence in 2005. chapter 15 bankruptcy code deals majorly with businesses in another country. This is also known as cross-border insolvency.
In continuation, out of all the chapters of bankruptcy, the most used are chapters 7, 11, and chapter 13. And, in as much as bankruptcy favors businesses and relieves them of the pressures of repaying debts immediately, it can put a dent on your once clean credit score.
A bankruptcy report does not go away immediately. It stays on your credit for years. Even up to 10 years or 7 years at most. So, whenever you go for a loan or mortgage, or whatever has to do with getting money from others. The credit report will show you once filed for bankruptcy. This in turn may cause major setbacks to individuals or businesses because lots of people will not want to associate with that type of report.
