Filing Bankruptcy
Below is a MRR and PLR article in category Finance -> subcategory Other.
Understanding Bankruptcy: A Guide
Overview:
Bankruptcy is a legal process designed to help individuals or businesses unable to meet their financial obligations, while also safeguarding the interests of creditors. This process begins with the filing of necessary documents.
Bankruptcy Rates
According to the Scripps Howard News Service, nearly 1 in 60 households in the United States has filed for bankruptcy. This statistic is derived from the approximately 2.04 million filings before recent bankruptcy law changes. Although there was a significant drop in filings in early 2006 to a 20-year low, the numbers are expected to rise again.
Types of Bankruptcy
There are distinct chapters under federal bankruptcy law.
- Chapter Seven (Straight Bankruptcy): Involves the liquidation of most of the borrower’s property. A court-appointed trustee sells these assets to repay creditors.
- Chapter Thirteen (Wage Earner’s Bankruptcy): Allows borrowers to propose a repayment plan, paying a portion of their debts through installments based on income.
- Chapter Eleven: Primarily used by corporations due to its complexity and cost, rather than by consumer debtors who typically opt for Chapter Seven or Thirteen.
Borrower Liability
Once bankruptcy proceedings conclude, borrowers are generally no longer liable for the discharged debts. This can occur via a discharge order after a Chapter Seven case, or upon completion of a repayment plan in Chapter Eleven or Thirteen. Although debt is erased, the bankruptcy will remain on the borrower's credit report for up to ten years.
Considering Bankruptcy
Bankruptcy can be a necessary solution during severe financial distress but should be considered only as a last resort due to its lasting impact. Consulting a financial advisor before proceeding is highly recommended.
Recent Legislative Changes
On April 20, 2005, the President signed the Bankruptcy Abuse Prevention and Consumer Protection Act, effective October 17, 2005. This comprehensive act, spanning over 500 pages, substantially revises the handling of bankruptcy cases.
In summary, while bankruptcy can provide relief and a fresh start, it carries significant consequences that must be carefully weighed. Always seek professional advice to explore all available options.
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