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What Is Bankruptcy?

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What Is Bankruptcy?

Bankruptcy is a type of legal proceeding that allows a person or a business to resolve certain debts with creditors. The process provides debtors with a “fresh financial start." At the same time, it helps creditors to establish their rights on certain claims.

In most cases, creditors are not allowed to collect on debt amounts once bankruptcy is filed. They must wait until after the bankruptcy process is completed in order to resume collection efforts. This is known as an “automatic stay.”  Part of the reason behind this is that the debt payment terms are often re-evaluated and reorganized during the bankruptcy process.

What Are Some Different Types of Bankruptcy?

For individuals filing for consumer bankruptcy, there are generally two main options: Chapter 7 bankruptcy and Chapter 13 bankruptcy. Chapter 7 filings are known as “liquidation bankruptcy” because some of the individual’s property may be sold or “liquidated” in order to satisfy creditor debts. Not all of the property is liquidated however; some debts are “discharged” or forgiven to allow the person a chance to recover financially.

Chapter 13 filings are called “reorganization” bankruptcy. This type of bankruptcy provides the borrower with alternative options for re-arranging their finances so they can begin repaying the creditor. The debts are often not discharged; instead, the borrower and lender are sometimes allowed to re-work the terms of repayment to create a more practical repayment plan.

For businesses, commercial bankruptcy can also take many forms. For instance, there may be bankruptcy plans that revolve around farming industry companies, or bankruptcy filings for larger corporations. Thus, it’s important to determine which type of filing will most benefit the individual or the company.

What Are Some Advantages and Disadvantages of Bankruptcy?

Filing for bankruptcy has many advantages and disadvantages. Some benefits of bankruptcy include:

  • Automatic stay of collection efforts while the proceedings are underway
  • Fresh start for financial planning
  • Discharge of certain types of debt
  • New repayment plans

Some disadvantages include:

  • May affect the business or personal reputation
  • Negative effects on credit scores
  • May have some additional tax consequences

Thus, it’s important to understand the consequences of filing for bankruptcy. In most cases, it’s necessary to hire a lawyer when filing for bankruptcy.

Do I Need a Lawyer for Help with Bankruptcy Issues?

Regardless of what type of bankruptcy you’ll be claiming, it is in your best interests to hire a lawyer for help with the process. A qualified attorney can help advise you on which bankruptcy options are most suited for your situation. Also, if you encounter any disputes or legal conflicts during the process, your attorney can represent you in court if you need to file a lawsuit or be part of one.

Photo of page author Jose Rivera

, LegalMatch Legal Writer

Last Modified: 05-13-2014 05:01 PM PDT

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