Bankruptcy Definition
A person, couple or legal entity can file for bankruptcy when their debt payments exceed their ability to pay them. This is a difficult process to go through and to recover from. Most every major financial purchase requires a credit history, and those with poor credit or a bankruptcy on their credit report have more difficulty in purchasing homes, automobiles or starting new businesses. Entities include anyone or any organization with a viable tax identification number.
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Definition
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When an entity has more debt than it can pay and is unable to meet its monthly debt repayment obligations, it may file for bankruptcy. This is a legal process which it may elect to file or be forced to file by creditors where the assets of the entity will be placed in a trust to pay off as much of the debt as possible. Business entities or individuals may file one of three federal bankruptcy codes: Chapter 7, Chapter 11 or Chapter 13. The goal is to have debts discharged by creditors so it is no longer enforceable and removed from later credit histories.
Chapter 7
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An individual, partnership or corporation can file for Chapter 7 bankruptcy where assets will be liquidated to pay off debts. Those who qualify for Chapter 7 bankruptcy must have a currently monthly income less than the state median. Chapter 7 can dismiss child support, student loans and taxes owed in most cases and does not file a repayment plan like Chapter 13.
Chapter 11
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Chapter 11 is an attempt to reorganize the company to remain in business and repay the debts over time. An entity cannot file Chapter 11 twice within the same 6-month period. To file Chapter 11, the entity must first file a petition with the bankruptcy court either on its own or as demanded by creditors. A review of assets and debts taken with income and expenses is itemized. Anything that is considered as assets--including future contracts--are considered, and a payment schedule is created by the trustee to repay debts and reorganize the company. Chapter 11 does not put stockholder assets or shares at risk for corporations but may do so for partnerships and sole proprietorship.
Chapter 13
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This is a plan that will dismiss certain debts but not all. It is referred to as a "wage earner's plan" to help individuals or couples to repay most, if not all, of their debts. This is a plan where the person filing can still save his home and retain the asset by completing a 3- to 5-year repayment program of his debts. The time frame is determined by calculating the monthly income against the state's median income. If it is less, the time frame for repayment will be 3 years or less. If it is more, then the plan will be 5 years in most circumstances. Creditors are prohibited from beginning or continuing collection efforts once the person has filed for Chapter 13.
Post-Bankruptcy
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Filing bankruptcy provides an immediate solution in a situation where there is little hope. Debt begets more debt with late fees added to principals and other fees making the debt grow faster than the debtor can handle. By filing under the right bankruptcy code, creditors are halted and a plan is created. Bankruptcy will remain on a debtor's credit history for 7 years and will more than likely create higher credit rates for new credit cards, auto purchases and mortgage financing.
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