Consumers and corporates consider filing for bankruptcy when they are unable to discharge their debt obligations. This either results in restructuring a company or liquidating the assets in order to settle the dues. Generally, debt-laden individuals prefer filing for bankruptcy under Chapter 7 of the US Bankruptcy Code.
In case they are not eligible for that, they can try and file under Chapter 13. The latter is meant for both individuals and sole proprietors. Chapter 11 is primarily meant for companies that want to avoid liquidation. It helps restructure or reorganize the company, so that it can continue its operations.
Bankruptcy Chapter 7
Filing for bankruptcy under Chapter 7 is an alternative for people who are unable to discharge their debt obligations. A person filing for bankruptcy under Chapter 7 needs to submit these information to the court.
- List of creditors and their claims
- Details of monthly income and expenditure
- Details of the assets and liabilities of the debtor
- Any unexpired lease agreement, contracts that may be enforced and a general statement of financial affairs
- Details regarding the spouse's financial position regardless of whether partners are jointly filing for bankruptcy.
Once the petition is filed, a trustee is appointed to oversee the liquidation of the non-exempt assets of the debtor. In case the assets are insufficient to settle the dues, the remaining amount is requited. Certain assets may be exempt in accordance with the provisions in the US Bankruptcy code. However, the debtor stands to lose most of the assets.
Filing under Chapter 7 does not result in the debtor having to follow a repayment plan and pay off all the dues. Hence, many people prefer this option.
Bankruptcy Chapter 11
Chapter 11 is an option that is pursued by companies as an alternative to liquidation. Both General Motors and Chrysler filed for bankruptcy under Chapter 11. Both companies underwent extensive reorganization that helped reduce their liabilities significantly.
Bankruptcy Chapter 13
Not everyone is eligible to file under Chapter 7. The Bankruptcy Means test determines whether the individual is eligible to file under Chapter 7. People who fail the Means test will be forced to file for bankruptcy under Chapter 13. Under this, a debtor who has a regular income is obligated to discharge all the dues within a period of 3 to 5 years.
Chapter 7, on the other hand, absolves the debtor the responsibility of discharging unsecured debts that cannot be settled by the liquidation of assets. Chapter 13 is often referred to as the wage earner's plan, wherein, the wage earner makes the scheduled payments to the trustee, who hands over the payment to the creditors.
Filing for bankruptcy under Chapter 7 generally costs $335, while filing under Chapter 13 costs much more. However, one must remember that Chapter 7 does not eliminate a person's debt obligations. In fact, one's Individual Retirement Account may also be used to settle the dues. People may also lose possession of their home.
Filing under Chapter 13 gives the debtor an opportunity to settle the debts under a different set of covenants. It allows the debtor to retain possession of the house, retirement accounts, and other assets that have been used as collateral for the loans, as long as the dues are settled within a period of 5 years.
Filing for bankruptcy should be the last resort for both individuals and corporations. Companies can consider commercial debt counseling, and if that does not yield results, restructuring may be better than liquidating assets.
People should consider Consumer Credit Counseling Services (CCCS) or try and consolidate debts. Even borrowing from 401(k) to settle debts may be a better option, than filing for bankruptcy.