Wikipedia defines bankruptcy as “a legal status of a person or other entity that cannot repay the debts it owes to creditors”. Depending on the situation, the status of bankruptcy can be imposed by court order or declared by the debtor. The primary purpose of bankruptcy is to allow the individual or company to shed their crippling debt and find a way to have a fresh start. Here in Suzzanne Uhland’s we have mentioned the topic before, but today we want to take a deeper look into some of its more technical aspects and talk about litigation and how it works.

There are different types of bankruptcy and generally, they can be divided into two broad categories: liquidation and reorganization. In liquidation, the debtor’s assets are sold and the proceedings are given to the collectors in order to cover some fraction of the debt. After this is done, the debts are erased and the creditors may not make any more collection attempts. In reorganization bankruptcy, the debtors are able to keep their property, but they must come to an agreement with collectors and create an installment plan so they can repay some of the debt through a period of time.

Bankruptcy litigation is the legal process through which an individual or a business, may receive debt relief by filing their status in a bankruptcy court. Bankruptcy in the United States, are handled at the federal level, so the rules apply to all cases regardless of the state of residence. The names of the different kinds of bankruptcy chapters that it can be filled under, are named after their respective section under the United States Code and there are three primary ones; chapter 7, chapter 11 and chapter 13.

Chapter 7 Bankruptcy

Chapter 7 is the most common type of bankruptcy filed in the United States and is usually called liquidation. Chapter 7 can be filled for an individual or for a business. Some property is exempt from the filling, but the rest of the property is sold and the collectors will start getting paid with the ones who took the least risk being paid first. The truth is that most of the assets are kept by the debtor, and with good counseling and support by an agency specialized in bankruptcy litigation, the process can be quite simple and allow them to once again start fresh and get on with their lives. When filing for chapter 7 bankruptcies, a partnership or business is not eligible to receive a bankruptcy discharge while an individual is. Bankruptcy discharge means that you are relieved from your debt and that creditors are prohibited from taking collection actions, calling you, sending letters of suing over your past obligation.

Chapter 11 Bankruptcy

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While available to individuals, chapter 11 bankruptcies are mostly used by businesses whether they are corporations, sole proprietorship or partnerships. In contrast with chapter 7 in which the business is liquidated, chapter 11 bankruptcy seeks for a way to reorganize the operation and keep the corporation alive and continue paying creditors over time. The most important aspect to understand is that under chapter 11 the debt is not automatically forgiven, but instead, a plan is created to change some conditions of the credit but to continue paying for the money that is owned. It is possible also; that control of the business goes to the creditor in the event that the corporation is insolvent and there is just simply no way that the credit can be repaid.

Chapter 13 Bankruptcy

Chapter 13 bankruptcy can be considered a chapter 11 for individuals instead of businesses. Under this chapter, individuals do not have to surrender their assets, but instead, they can create payment plans that can last up to five years in which they can relieve their obligations. This type of bankruptcy is usually filled by individuals who are able to continue earning an income that while limited, it is sufficient to slowly pay off their debt. Chapter 13 seems more like a debt consolidation strategy than a bankruptcy filing but it isn’t just that. Filling under this chapter allows you to secure debts that are not eligible under other conditions and it has advantages like stopping foreclosures and the discharge of some types of debts that are not dischargeable under chapter 7 bankruptcy.

Bankruptcy litigation is a strategy that offers companies and individuals an opportunity to remove crippling debt off their backs. While effective, it is advisable that other alternatives are pursued before making this decision and that perhaps through counseling, the parties involved are able to make an educated decision of how they should approach the situation and how they should manage the consequences that come from making these decisions. Said consequences are long-term and they could be quite negative if decisions are made lightly.

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