What is Bankruptcy? Easy Explanation

ByVladana Donevski
June 10,2022

When sifting through information on bankruptcy, people tend to consider it a horrifying and lengthy legal process that can leave them in permanent financial ruin from which they can never fully recover. 

They may also assume that declaring bankruptcy will act as a magical off-switch and bring financial relief to anyone on the road to financial disaster by eliminating all of their debts. 

Neither of these assumptions is necessarily true, as the definition of bankruptcy simply involves legally declaring that you can no longer repay your debts. 

This article will seek to dispel these myths by providing information to ultimately answer the question: what is bankruptcy?

Bankruptcy Explained

Bankruptcy is a legal action whereby a person or a company can legally declare that they can no longer repay their debts in front of a bankruptcy court. By doing so, they may be granted relief by being discharged from bankruptcy. 

In the United States, bankruptcy proceedings are governed by federal law under six specific chapters of the US Bankruptcy Code. Claiming bankruptcy is achieved by filing under a specific bankruptcy chapter. However, only four are meant for individuals and businesses out of six chapters, as Chapter 9 deals with municipalities, and Chapter 15 is used in foreign cases. Our focus will be on chapters 7, 11, 12, and 13. 

These four different bankruptcy types are categorized based on the parties to the bankruptcy: whether they are an individual or company and the type of legal action or relief sought. Bankruptcy proceedings are achieved through two types of legal action: liquidation and reorganization. 

Liquidation happens when you file for bankruptcy, and your assets are sold and the proceeds distributed to creditors to repay debts. Filing for Chapter 7 bankruptcy, which is the most common filing, leads to the liquidation of your assets. However, claiming bankruptcy is not limited to declaring that you can’t pay your debts and then asking the court to sell your assets to pay the creditors back. 

Filing for bankruptcy can also mean seeking assistance from the court in reorganizing your property to allow you to pay off individual or company debts. 

Reorganization bankruptcy filings are different from liquidation filings because, in most circumstances, they allow individuals and companies to keep their property. 

The different bankruptcy types and their legal implications are summarized below:

  • Chapter 7 - Personal or liquidation bankruptcy, best for individuals and businesses
  • Chapter 11 - Business or large reorganization bankruptcy
  • Chapter 12 - Debt relief for family farmers and fishermen
  • Chapter 13 - Wage earner’s plan, best for individual income earners

Millions of people file for bankruptcy each year. The purpose of filing for bankruptcy and the end goal of any related proceeding is to be discharged from bankruptcy.

Common reasons for filing for bankruptcy are large medical bills, unemployment, loss of a family member, natural disaster, or business failure. 

What Happens if I Declare Bankruptcy: Individual Bankruptcy Explained

Filing for bankruptcy involves submitting a bankruptcy petition to the bankruptcy court clerk. The court may liquidate or restructure some of your property depending on the type of bankruptcy you’ve claimed. The discharge will ensure that creditors will not chase that debt again in a few years if you do not have sufficient assets to cover your debts.

Chapter 7 bankruptcy, for example, will allow the court to gather and sell your assets to pay your creditors and create relief by preventing them from taking further action to collect debts, such as harassing you or pursuing legal action against you.

In case of any bankruptcy filing, creditors must stop all action, including legal action to recover the debt and broad measures such as debt collection calls, letters, and personal contact. 

Your bankruptcy petition must disclose and outline all your financial and personal information, including a detailed list of all assets and liabilities, a list of creditors and the amounts owed to each party, and any income statements and tax records, including the latest tax returns.

It’s important to note that filing and administrative court fees are involved. Depending on your circumstances, the court may waive filing fees or require you to pay the fees in installments. 

What Happens After Filing for Bankruptcy?

The court assigns a bankruptcy trustee to meet with you to evaluate your financial situation and arrange for the collection of your assets. The trustee then sells non-exempt assets and redistributes the proceeds to your creditors.

The total length of bankruptcy proceedings can average between three to six months. Upon completing the case, you will be discharged from your debts. 

Being discharged from bankruptcy means that most remaining debts are fully forgiven. This includes almost all types of unsecured debts:

  • Credit card debt
  • Unsecured loans
  • Personal loans
  • Medical bills
  • Utility bills

As well as some secured debts such as:

  • Home mortgages
  • Auto loans
  • Tax liens 

When dealing with secured debts, the ones backed by mortgage or collateral, you’ll usually have a choice to make. You can allow creditors to repossess the property that secures the debt, continue to make payments to your creditor, or pay a sum equal to the collateral’s replacement value. 

Can All Debts Be Forgiven? 

Not all debts will be discharged or forgiven after declaring bankruptcy. Certain types of debts will remain:

  • Student loans
  • Court fees 
  • Child support 
  • Spousal maintenance/spousal support payments 
  • Obligations arising due to fraud 
  • Obligations arising related to personal injury claims 
  • Government fines and federal, state, and local taxes

Who Can Claim Chapter 7 Bankruptcy? 

Chapter 7 bankruptcy is the most common claim for individuals. However, claiming bankruptcy this way may not be available to all. There is a presumption of abuse in place, meaning that you must pass the means test before filing. This test is compulsory and ensures the bankruptcy laws are not abused, and court resources are not wasted. 

The means test prevents high-income earners from qualifying for Chapter 7. To pass the means test:

  1. Before claiming, your household income must be below your state’s median income for six months.
  2. You must carefully gather a list of all your expenses and divide them into allowable and non-allowable expenses. 

Your non-allowable expenses are expenses that could be put towards paying off any debts. The remaining expenses and any of your disposable income must be low enough to qualify for filing. 

A bankruptcy lawyer can assist you with going through your expenses and determining whether filing under Chapter 7 is the right course of action for you. Access to legal representation can be costly, but you can explore alternatives with our guide to the best online legal services.

Petitioning To Keep Your Property in Bankruptcy Proceedings

When declaring bankruptcy, you can petition to keep some of your property. This includes the furniture in your home, your clothes, and in some instances, your house and personal vehicle. What you get to keep when filing for bankruptcy could depend on the state you live in. 

In the US, bankruptcy filings are governed by federal law, but the personal bankruptcy law on the excluded property varies from state to state. Therefore, the types of property you may get to keep will vary depending on where you live.  

Bankruptcy lawyers are generally employed to assist you in successfully negotiating to keep your property. There is no hard and fast rule on what you will get to keep, as it depends on your circumstances. 

Chapter 7 and Student Loans

Going through the bankruptcy process to relieve yourself from repaying student loans might not be the best idea, as bankruptcy won’t necessarily protect you from this obligation. 

Student debt is considered unsecured debt and will not be automatically discharged by the court. Instead, you’ll need to commence additional legal proceedings known as adversary proceedings and successfully establish that the continuation of student loan repayments will cause you undue hardship. 

The student loan provider may oppose your claim, and you will need to prove it according to legal standards set by the federal court. 

Other Types of Bankruptcies: Chapters 11, 12, and 13 Explained 

Bankruptcy chapters 11, 12, and 13 do not involve liquidation. Some companies and individuals may wish to restructure their finances to pay off their debts over the long term or decide on a different approach to bankruptcy.

Chapter 11 of the Bankruptcy Code allows companies and business partnerships to continue their operations and keep their property by asking them to create and carry out the terms of a formal plan to pay off their debts. This claim is commonly referred to as company bankruptcy, and it can force companies to completely restructure their operations. 

Restructuring is usually achieved by encouraging leadership changes, closure of facilities, and the renegotiation of debts. The main benefit is that the company can avoid liquidating its assets in the short term and continue operations. 

Chapter 13 of the Bankruptcy Code is also called a wage earners plan. It allows individuals to reorganize their debt through a formal debt repayment plan based on their income for the last three to five years. 

Chapter 13 filing is limited to wage earners, allowing them to keep their property. Individuals must have a regular income and are expected to repay as much debt as possible through regular monthly installments. 

Lastly, Chapter 12 of the Bankruptcy Code is similar to Chapter 13, except it’s only available to family farmers and fishers with regular annual income. 

Final Thoughts

Bankruptcy may seem like a scary word, but it doesn’t have to be. By understanding the basics of bankruptcy and what it can do for you, you’ll be able to decide whether or not this is the right step for yourself or your business. If you’re feeling overwhelmed by debt and don’t see any other way out, bankruptcy could be the solution. 

Personal bankruptcy filings may remain on your credit history report for 10 years and directly impact your ability to receive approval for future loans. Thankfully, there are alternative business loans for bad credit providers available.

Bankruptcy can provide a fresh start, but choosing the right chapter is important. If you are considering bankruptcy, it’s best to consult with an experienced attorney who can guide you through the process and protect your rights.

FAQ
Do you need a lawyer to file for bankruptcy?

You don’t necessarily need a bankruptcy lawyer to file for bankruptcy, although it’s strongly recommended. A good lawyer can assist you with investigating your claim and compiling your documents to ensure that you are filing under the correct chapter of bankruptcy and that your claim passes the means test. 

They can also assist you with applying for property exemptions, which will help determine whether you get to keep your home and car after filing and help with additional proceedings if you are seeking to discharge your student loans. 

Can you recover from bankruptcy?

Bankruptcy is a complex process, but it’s possible to recover from it. By rebuilding your credit and creating a solid financial plan, you can eventually get back on your feet. If you’re feeling overwhelmed, don’t hesitate to reach out for help, as plenty of resources are available. You can rebuild your life after bankruptcy and be in a much better financial position with some time and effort.

What are the advantages of filing for bankruptcy?

Getting a bankruptcy discharge is the main advantage of filing for bankruptcy. Upon discharge, all creditors must immediately stop debt collection actions such as personal collection calls and threatening acts such as disconnecting home utilities.

What is bankruptcy?

Bankruptcy is a legal status of an individual or a business that cannot repay the debts incurred to creditors. A bankruptcy filing can offer debt relief and allow you to start fresh financially. There are several types of bankruptcies, each with its benefits and drawbacks. If you are considering bankruptcy, choose the right chapter for you.

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Virtual assistants provide administrative, technical, or creative services to clients from their home offices. For this role, you’ll need excellent organizational skills and a willingness to dedicate time and effort to finding the right clients. You will also have to compete with some established virtual assistant companies, but if you focus on smaller businesses and entrepreneurs, you’ll be able to make more than a decent living with this option. Offer Event or Wedding Planning and Organization When it comes to profitable eCommerce business ideas, providing wedding and event organization is another service you can promote and book online. Not everyone has the time or creativity to organize everything for their big day, company outing, or kids’ party.  This is where your eCommerce site comes into play. You can offer services online and allow your customers to book through your eCommerce store.  For this to be successful, you'll need to create a large network of vendors, caterers, and other third parties. However, if you already have such service providers standing by, this business could be the right idea.  No Clients Needed If you are an introvert and prefer not to deal with clients or customers, you can still make money online. There are excellent online eCommerce business ideas you could pursue, so let's discuss those as well. Start With Affiliate Marketing Affiliate marketing is a type of online marketing where you promote other people's products and earn a commission on any sales that you generate. This can be a great way to make money online if you're able to drive traffic to your affiliate links. Just be sure to choose products that are relevant to your niche and audience. So, where do you start with affiliate marketing now that you’ve chosen it among other ideas for an eCommerce business on our list? You could create a blog, social media account, or YouTube channel where you review products from an array of brands. Having a niche market, you can tap into through your blog or account can be a great way to earn affiliate commissions, as well as build up your own brand and authority. You'll need to invest some time and effort into creating high-quality content, but if you can build up a large following, you'll be able to make a great living reviewing products online. Launch a Dropshipping Business Another excellent choice that belongs to the easy eCommerce business ideas category is launching a dropshipping business. When you dropship, you simply sell products sourced and fulfilled by a supplier. This can be a great way to get started in eCommerce with little or no investment. You just need to find a reputable supplier and set up your eCommerce store. Once you've got everything up and running, it's just a matter of driving traffic to your site and making sales. You'll also be responsible for customer service and ensuring that your shoppers are having the best experience. After all, 91% of customers will simply leave and never return if they have a bad experience with your store, which is something new businesses cannot afford. Bottom Line There are plenty of ideas for an eCommerce business that involve selling products or services. So, if you're looking to get started in eCommerce, be sure to choose the option that best suits your skills and interests. Moreover, take a closer look at the professional network that you’ve built up over the years and then decide which avenue to pursue. With commitment and effort, you can start making money online in no time!
By Vladana Donevski · June 23,2022
The documents for incorporation differ by state, and the nature and type of the business looking to incorporate. In the United States, Corporations and Limited Liability Companies (LLCs) are the two main types of business entities, and require different documents to achieve that. In this article, we will learn the differences between articles of incorporation and organization, their components, the filing process, and why they’re necessary. Let’s get right into it! Articles of Incorporation: Definition The articles of incorporation - also known as a corporate charter, articles of association, or a certificate of incorporation - are legal documents filed to establish a company of a specific type as a business entity. In other words, they give the corporation its legal identity. In practical terms, for a corporation to open a bank account, issue stock or shares, operate within a state, and engage investors, it must first file articles of incorporation. In the United States, this is usually done with the Secretary of State or company registrar, depending on the state of incorporation. Delaware and Nevada are the most popular states for registering your corporation, because of their friendly regulations and minimal tax requirements. Articles of Incorporation vs. Organization Most people tend to confuse articles of incorporation with articles of organization, but they are not the same; now that we’ve defined the former, we’ll do the same for the latter. The articles of organization are filed at the point of creating an LLC. In terms of function and components, they are no different from articles of incorporation. However, the regulatory requirements are different and might be stricter, depending on the state and industry the business is in. These are the primary thing to research for prospective owners learning how to incorporate their business. The next step is filing your articles, so it’s time to learn how it works. Filing Articles of Incorporation The Required Documents The components of documents to be provided upon filing articles of incorporation vary by state, but many of them are the same everywhere. Most of these components will be on the face of the certificate of incorporation, and they include: The corporation’s name and address The name and address of the registered agent responsible for accepting legal documents on behalf of the corporation; some states may require a formal agreement of the agent’s acceptance of this responsibility. The number and type of authorized shares; more details on this can be found in the articles of incorporation and their bylaws. The type of corporate structure (e.g., profit, nonprofit, etc.) The names and addresses of the founding board members The names, signatures, and addresses of the persons handling incorporation; a corporation can have multiple incorporators who do not need to be directors or stockholders. If applicable, the lifespan of the corporation, as some corporations are made to exist for a limited time and carry out a particular function. The number and type of stocks the corporation can issue. Other components which are not required, but can be included, are: The limitation of directors’ liability Stockholder actions The assignment of authority to call stockholder meetings The purpose of incorporation, which may not need to be specific, depending on the state. The Filing Process The end goal of filing is to receive a certificate of incorporation. After preparing the documents, the incorporator should schedule an appointment with the designated filing agency of their state. Procedures differ between states, but generally begin with paying a filing fee after submitting the required paperwork. The process is completed upon acceptance of the paperwork and approval of the corporation’s registration. In most states, corporations must have both articles of incorporation and bylaws, even though bylaws are not to be filed. Bylaws only serve as internal documents setting out the rights and responsibilities of a corporation’s shareholders, directors, and other officials. Benefits of Incorporation Corporate Brand Identity Customers are more inclined to trust and do business with a brand when its corporate identity is established, as are investors. Banks are more likely to finance your venture if it’s an official business, and you’ll certainly look better in the strict due diligence checks on your business. Where no official or formal records are found, chances are that funding will disappear for lack of confidence in the safety of investing in you. Tax Advantages A corporation’s tax liability can be reduced depending on the state of incorporation. This tax reduction is often justified through operational costs like insurance, green energy investments, employee retirement benefits, production costs, employee wages, etc. Separation of Liability Filing your articles of incorporation separates the corporation's liabilities from those of its owners, in events of criminal activity, injury, or loss. The owners’ personal assets cannot be seized, auctioned, or sold if the business goes into debt. On the other hand, owners of unincorporated businesses are at risk of losing personal property in such situations. Protection of the Business Name Before an applicant is accepted, the state of incorporation will conduct a search to ensure that no other existing business or corporation has the same name. Applications for companies with an already taken business name won’t go through, because those names are protected - but only if their owners incorporated in time. Business owners also have the right to seek legal consequences for infringement of this protection. Perpetual Existence For businesses with no preset lifespan, the articles of incorporation guarantee longevity and perpetuated existence. This means that, in the event of withdrawal or death of one or all owners, the business remains in existence. By extension, a transfer of ownership is an option for incorporated entities. Unincorporated entities suffer a different fate and cease to exist in such situations.
By Vladana Donevski · June 30,2022

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