Bankruptcy is a legal process that allows for the elimination or restructuring of debt owed by an individual or a business entity. There are three primary categories of bankruptcy filings available. For individuals facing financial hardship, the options include Chapter 7 and Chapter 13 filings. Businesses seeking to reorganize their debt can utilize Chapter 11 bankruptcy.
Individuals file for Chapter 7 or Chapter 13 bankruptcy when they need substantial financial assistance. Chapter 7 bankruptcy discharges all of an individual’s debt, providing a fresh start. However, due to legislative changes in October 2005, not everyone can achieve this total debt relief anymore.
The new bankruptcy law introduced a means test, which prospective filers must pass to demonstrate their eligibility for Chapter 7 bankruptcy. This test has made it harder for consumers to qualify for complete debt elimination. Additionally, the cost of legal representation for bankruptcy cases has increased substantially, with attorney fees rising by as much as 100% following the implementation of these new laws.
Prior to these changes, Chapter 7 filings constituted approximately 70% of all personal bankruptcy cases. One of the advantages of Chapter 7 was that it allowed individuals to absolve themselves of debts that they might have been able to repay given sufficient time and more favorable interest rates.
Chapter 13 bankruptcy, on the other hand, functions more like a debt restructuring program. In this type of proceeding, a debtor’s creditors are required to accept repayment of the principal amount owed without interest over an extended period. One of the key benefits of Chapter 13 is that it allows the individual to retain all of their assets.
A common motivation for choosing Chapter 13 bankruptcy is the desire to prevent foreclosure on a home. Debtors can achieve this by halting foreclosure proceedings and catching up on overdue mortgage payments. The court reviews the debtor’s budget and approves a proposed repayment plan. Depending on their income level, some individuals are compelled to file for Chapter 13 due to the 2005 law changes.
Businesses facing financial difficulties can also seek protection through bankruptcy. Chapter 11 bankruptcy allows companies and corporations to shield themselves from creditors while they work on restructuring their debt. This option is also available to high-income individuals, as it does not impose income restrictions on the filing entity.
Chapter 11 has played a crucial role in preserving many prominent companies over the years. A notable example is K-Mart, which not only survived Chapter 11 bankruptcy but emerged strong enough to subsequently acquire its higher-end competitor, Sears.
