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What Is Bankruptcy?

Autor:   •  November 24, 2012  •  Essay  •  2,168 Words (9 Pages)  •  1,146 Views

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What is Bankruptcy?


From a financial point of view It is basically a legitimate option that can be or must be considered when financial obligations can no longer be met by an individual or a business.

So bankruptcy is a legal status of an insolvent person or an organization, that is, one that cannot repay the debts owed to creditors. In most jurisdictions bankruptcy is imposed by a court order, often initiated by the debtor.

Bankruptcy is not the only legal status that an insolvent person or organization may have, and the term bankruptcy is therefore not the same as insolvency. Bankruptcy also provides a way to get back on feet by improving financial condition usually within a period of five years. If we look closely at what bankruptcy offers, preserving personal assets helps to keep afloat while avail of a more reasonable repayment package based on current financial condition and usually at a lower interest charge. All of these work in favor of a debtor and should therefore put bankruptcy in a more positive light. From a personal standpoint, whenever difficulty in keeping up with financial obligations becomes an issue, bankruptcy should always be a consideration.


There are several different types of bankruptcy filings and each is known by the title of the chapter of the Federal Bankruptcy Act in which they appear. Each chapter contains a different set of laws and rules. The two most common types of bankruptcy are Chapter 7 and Chapter 13.

Chapter 7 bankruptcy is one of the most common types of bankruptcy used by individuals, but may also be used by businesses. This type of bankruptcy is the most severe. Under Chapter 7, a court-appointed trustee collects the individual's assets. The trustee sells the assets for cash and pays the proceeds to the individual's creditors. Assets that are exempt under federal or state law do not have to be liquidated. Once the Chapter 7 process is final, the filing cannot be repeated for six years.

Chapter 13 bankruptcy is designed for an individual debtor with a steady source of income. It can also be used by small businesses. Under the Chapter 13 plan, also called "individual reorganization," the debtor must settle his debts over a three to five year period. Under Chapter 13, the debtor is allowed to keep his property. At a confirmation hearing, the court either approves or disapproves the plan. There are no time restrictions on when a Chapter 13 can be filed

Chapter 11 bankruptcy is targeted to larger businesses, but individuals may also use this reorganization plan. Chapter 11 is similar to Chapter 13, but with more requirements. However, if all a debtor needs is a plan to pay off debts, then a Chapter 13 or Chapter 11 is preferable, rather than a Chapter 7, particularly when trying to reestablish their creditworthiness.



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