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Understanding the Different Types of Bankruptcy

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The very word bankruptcy seems to clearly denote a financial malaise of sorts; the fact is, however, that it can be a very sensible solution that places a business in a better position to correct some missteps and resume on the path to profitability.

You may hear of celebrities and companies declaring bankruptcy; it is important to understand the different types before rushing to judgment. It is a mechanism by which one can avoid the seizure of assets, for example. More specifically, Chapter 11 bankruptcy is the one more conducive to reorganization to help you move forward (with the same company). There’s also Chapter 13 bankruptcy; which is beyond the scope of this article.

On the other hand, Chapter 7 is the option that pretty much disbands the business and sells off assets to help you pay off debts, and forgives the ones you cannot pay off. We’ll take a look at some important features of both types.

Chapter 7 Bankruptcy Details

The overwhelming majority of bankruptcy cases filed in the United States are of the Chapter 7 variant. It is characterized by the relative simplicity in filing it, when compared to the often lengthy process of Chapter 11. Exactly how long does Bankruptcy Chapter 7 take? This depends of several factors; chief among them is whether or not you – the debtor – receives a discharge of liabilities for your outstanding debts. This happens in 99% of Chapter 7 Bankruptcy filings; and then, the process concludes quickly.

The first order of business is to fill out a form denoting your financial affairs; this includes all of your present assets, debts and other pertinent aspects of your financial history. The place where you file this is with the bankruptcy clerk in the district in which you’ve resided for the past six months. The minute you properly file, you receive an automatic stay – which simply means that your creditors are barred from (easily) implementing collection actions against you or your business.

Next, a meeting is scheduled between creditors and debtors; this so-called 341 meeting will include a determination of what debts may be exempted, as well as many other things. As pertains to understanding the length of time it takes to fully file and a Chapter 7 bankruptcy petition, 60 days after the 341 meeting, the creditors and their representation can mount a challenge to any discharges you claim.

It is important to note that partnerships and corporations do not receive bankruptcy discharges, by law. As a sole debtor, your discharge will occur about 4-6 months after you file your case; after which you will be deemed not responsible for the debts incurred as a part of your filing – as long as these were unchallenged in the 341 meeting. If they were, then the case will take longer before a resolution is reached.

Chapter 11 Bankruptcy Summary

Chapter 11 bankruptcy, on the other hand, is more of a protective measure used by businesses to avoid paying bills for long enough for an asset restructuring to occur. In fact, the terms of the reorganization often mandate that the business need pay just a percentage of the full amount owed to creditors, which is why it can be a very good strategy when used correctly.

Why would this be allowed? Well, some businesses may temporarily be in financial straits, but actually possess a great business strategy with a high degree of “upside.” That is to say, there’s every reason to believe – by certain business metrics – that the company in question is capable of doing millions of dollars worth of future business, if they just stay afloat during this temporary downside.

Another of the many reasons Chapter 11 works so well for certain companies is because it provides them with a competitive advantage by reducing the cost of their liabilities, so that capital can go to other areas – such as research and development, for example.

Much like Chapter 7, Chapter 11 also diminishes the personal risk of the actual business owners – since ceasing operations would adversely affect your daily lives. Bills don’t stop coming in, after all. So by filing either, you can be exempted from paying off creditors for long enough to restructure – and all the while, no more business-related costs are accruing.

Author Lauren Webber is a former HR manager and lover of psychology who now runs among her other pursuits. Her interests range from the corporate world to health and self-care to home improvement and parenting. Now if only someone came up with a way to extend the day by about 20 more hours, she could dedicate herself to all of these equally and constantly.

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