Bankruptcy Law – A Primer
Bankruptcy could mean different things to different people. While it could be a disastrous situation for some who could not meet their financial needs, on the other hand, bankruptcy could be an opportunity to avoid meeting financial obligations due to financial crunch that has visited their businesses.
Bankruptcy – Definition
In common parlance, bankruptcy refers to a legal process that helps business houses and individuals either to write off their debt completely or clear the debt over a period of time. The entire process is carried out by the rules and procedures established by the United States Bankruptcy Courts. It’s not always that debtors ask for bankruptcy; in some case, even the creditors can force the debtors into bankruptcy proceedings.
Kinds of Bankruptcy
Legally, there are six kinds of bankruptcies. However, not all bankruptcies are commonly employed by the debtors or creditors. For instance, there are bankruptcies for municipalities and a similar provision for farmers. The most common forms of bankruptcies are dealt with under Chapter 7, 11, and 13 of the Bankruptcy Law.
Bankruptcy under Chapter 7 requires the debtor to transfer most of his assets to a bankruptcy trustee, except certain possessions, like furniture, clothes, and household. In order to recover the money required to pay off the debt, the bankruptcy trustee sells the debtor’s property. The sale of debtor’s assets by the bankruptcy trustee means that the debtor is now free from most of his debt, though there are certain debts that still need to be taken care of, including school loans, alimony, and child support.
Bankruptcy under Chapter 11 is usually resorted to in case the debtor is a business house or someone with considerable assets at their disposal. This type of bankruptcy allows the debtor to exercise control over the routine business affairs. The debtor, creditors, and the bankruptcy trustee work as a team to chart out a plan that will help the debtor to repay some or all of the existing debt.
Bankruptcy under Chapter 13 does not require the debtor to either hand over their assets to the bankruptcy trustee or the sale thereof. Instead, the debtor is simply required to commit a significant portion of their future income or profit, which is settled by the Bankruptcy Court, towards the clearing-off of their existing debt.
Recent Amendments In Bankruptcy Law
With the commencement of Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, filing bankruptcy under Chapter 7 has been made more stringent with a view to protect creditors and discourage the debtors from settling their debts by simply offering their assets for sale. In a way, Chapter 13 bankruptcy proceedings are sought to be promoted in order to give relief to the creditors.
Impact of Bankruptcy Proceedings On Debtor’s Credit History
Initiation of bankruptcy proceedings, undoubtedly, makes it difficult for the debtor to obtain lines of credit. But there is a silver-lining to this dark cloud of bankruptcy. Despite the bankruptcy staying on the debtor’s credit report for up to 10 years, effective financial planning and astute management of resources can result in significant improvement in the credit standing within a few years.
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