Declaring bankruptcy can be a stressful, complicated process with many detailed steps that may overwhelm individuals and business owners. Anyone looking to declare bankruptcy should understand the basics of bankruptcy to appropriately consider the different categories, processes, and expected outcomes.
Consulting with an attorney is essential to declaring bankruptcy without excessive stress or additional financial strain. Read below to learn more about the basics of bankruptcy and how Ritter Spencer Cheng PLLC can guide individuals through challenging legal circumstances.
What is Bankruptcy?
Bankruptcy ultimately allows a fresh start for honest debtors who can no longer pay their creditors. The debtor receives a plan from the court to pay or liquidate the debt. This bankruptcy process intends to boost the overall economy by providing streams of credit.
Bankruptcy cases are handled in federal court only. The court designates a trustee to assign payments with an attorney who can help navigate this scenario. Both individuals and businesses declare different types of bankruptcy, which are detailed further below.
What are the Most Common Types of Bankruptcy?
There are six bankruptcy chapters in the United States, but the following three types are the most common. The U.S. Bankruptcy Code governs these cases. Individuals and businesses should consult with an attorney to discuss which type of bankruptcy is best for their specific circumstances.
Chapter 7
Chapter 7 bankruptcy is primarily for individuals or, occasionally, businesses with few assets. It allows the debtor to no longer pay unsecured debts, meaning those not backed by collateral. As for non-exempt property, including extraneous assets such as a second home, the trustee may liquidate it to pay the creditor(s).
Chapter 11
Businesses most often file for Chapter 11 bankruptcy, which allows a company to increase revenue and cut costs. In this case, the debtor continues business operations while paying off its debts.
Chapter 13
When individuals have an income too high to file for Chapter 7, they file for Chapter 13 bankruptcy. This bankruptcy chapter applies to debts only under a certain amount, which fluctuates based on inflation. Payment plans typically take a few years, and the individual can keep even non-exempt property during this time.
When Should a Debtor Declare Bankruptcy?
Although no debtor wants to consider bankruptcy, debt can easily pile up and leave individuals and businesses with limited options. When income no longer covers debt and cash flow changes, one may want to consider declaring bankruptcy. Even if a debtor doesn’t qualify for bankruptcy, there are other potential debt settlements or loan options they may consider.
How Does One Declare Bankruptcy?
Declaring bankruptcy can be a complicated process that requires persistence. The debtor starts by finding an attorney they can trust to help them reach the best possible outcome. They then participate in mandatory credit counseling before filing a petition.
The petition is filed with the bankruptcy court and should list assets the debtor owns and the creditors demanding money. Once the petition gets approved, the court assigns a trustee. A stay is then placed on creditors, meaning they are no longer allowed to request payments. The creditors and debtor meet with the trustee, and, ultimately, a payment or liquidation plan is set into motion.
What Happens After Bankruptcy is Declared?
Bankruptcy cases are not often prolonged, as the creditor needs to get the money owed to them as soon as possible. When there are few assets and little money to be made, liquidation of the debts may arise. Questions around who owns the assets and how to use them as payment may also lead to further litigation or alternative dispute resolutions, such as mediation or arbitration. In bankruptcy, the court will determine what is best for all parties involved.
Bankruptcy can be the best solution to resolving debts when appropriately handled by an experienced bankruptcy and business attorney. With decades of experience, the lawyers at Ritter Spencer Cheng PLLC can guide clients through their unique circumstances. Our attorneys are prepared to aid businesses and individuals through the toughest economic situations. Contact us today or give us a call at 214.295.5070.
