When a person is not able to pay his debts or the debts of his business, he is said to be insolvent. He may seek legal protection from his creditors to prevent them from taking drastic actions such as auctioning his belongings. Alternatively, he could request more time to reorganize himself financially to repay the debt as he goes about earning a decent living.
Bankruptcy is therefore the legal procedure where one may declare his inability to repay the debt at the time. A bankrupt person might escape paying an outstanding debt at a particular period in time but there are also many demerits of the declaration of bankruptcy.
Until the recent times, bankruptcy was not an option and people who became bankrupt were treated as social and business pariahs. This was especially if the inability to repay the debt was due to financial mismanagement and fraud. In the ancient days, debt defaulters or bankrupt people could lose their body parts, or even be killed. In some cases, the defaulter and his family could be taken into slavery.
However, several years later, the punishment for failing to pay one’s debts became less severe although imprisonment was widely practiced. The authorities argued that failing to pay a debt was a major form of lawlessness.
With time, legislations have been put in place over a long period of time, which intentionally protected the bankrupt people from inhumane acts as well as to ensure that some, if not all portions of the debt was repaid. If they had property and agreed to liquidate it, they could be relieved of their responsibility to pay the debt.
These laws began to take effect in the beginning of the 19th century. They were designed to give the debtor some breathing space and enable them to have a strong footing to re-establish their financial strength and be able to survive.
On the other hand, some legislation has also been enacted to prevent people from abusing the concept behind bankruptcy. For instance, someone might file for bankruptcy deliberately to avoid paying his debts even though he could easily pay the debt.
In the United States, these laws are particularly provided for by the Constitution and established by Congress instead of the individual states. This is in order to create uniform bankruptcy laws in the entire country to avoid abuse of the laws by some people when they go to different states.
The most recent bankruptcy laws provide rules that are more stringent for people who are intent on filing for bankruptcy. One either must lose some of his property or agree to repay the debt over a certain period, such as five years in order to qualify for being declared bankrupt.
These laws were welcomed by many of the country’s top lenders but have raised objection from bankruptcy lawyers and consumer groups. On the one hand, people would be more accountable for their debts, but the laws would also punish people with genuine problems who are willing to pay debts but are unable.
Filing for bankruptcy is a crucial decision that needs to be taken with a lot of caution and after consultations with an attorney or a financial expert. In addition, several legislations passed in the recent past have made it increasingly difficult to file for bankruptcy. One legislation that stands out as the most stringent is the Chapter 7 of the bankruptcy laws that were signed by President George W. Bush in 2005, and which is still in effect. Another less severe law is found in Chapter 13 of the bankruptcy laws. Due to these laws, a bankruptcy record might continue for several years even after completion of a debt.
These laws are popularly referred to by their chapter numbers. A good understanding of these two laws might be helpful in future to prevent one from making the wrong choice. A person should choose the best plan between these two depending on one’s situation. To some people, Chapter 7 is the better option because your debts will be cancelled within 3 months after filing for bankruptcy. However, any property that you own, such as a car or a house, will be sold to recover as much of the debt as possible. Therefore, majority of those who file for bankruptcy qualify to do so through Chapter 7.
Chapter 13 is more difficult to qualify because the rules demand that you must show proof of the ability to repay the loan within the timeframe set, which is usually 3 to 4 years. Most people who have smaller debts and whose problem seems temporary are advised to file Chapter 13. The default in debt repayment could be caused by an issue such as suspension from work, which could be rectified when one is reinstated back to work after a certain time. In this case, no property is confiscated to cover the amount of debt owed, and the credit record stays for 7 years while if you file Chapter 7, your credit report remains for up to 10 years. You might not be able to obtain a loan or buy goods on credit during that time.
A bankruptcy case is usually filed in court of law and is determined by a judge who will consider the rules of exemption according to the rules of the state where the applicant resides. However, one must have stayed there for more than 730 days to benefit from the exemption of that state or else abide by the previous state’s rules. This prevents people from moving to a state that has better exemption rules, such as Florida, which allows one not to sell their home when they file for bankruptcy with Chapter 7.
However, although each state has its own rules for exemptions, most other laws are uniform for all states according to the new legislation. For example, one must show proof that they had received counseling six months before filing for bankruptcy. This ensures that one understands the implications and the procedures involved and that they accept the consequences. Most people who file Chapter 7 and who lose their prized possessions usually undergo a traumatic experience that can lead to depression.
The main reason behind bankruptcies is to offer liability assistance to companies and individuals whose assets are not sustaining enough to service the debts. Personal bankruptcy has the relevant assets threatened as the individual bears all liabilities as an entity. When an individual is facing financial problems like heavy debts, bankruptcy may come in handy. This is a very common challenge to many people because they are caused by factors that affect all of us. When faced with a dangerous financial crisis there is reason to think about a new start. The individual, if he/she realized that she needs to go through the bankruptcy process, will start by filing a petition. This will include your position regarding your assets and liabilities and the scheme of your creditors.
It is true that an employee of a company that is designed as sole proprietor would still file a personal bankruptcy since he is viewed as one of the assets of the company. It would be beneficial for single ownership companies to operate as a corporation. This gives the organization some shelter for its business assets in case of bankruptcy proceedings. It is possible to suddenly find yourself in a position of excess spending over income, main cause being over use of credit cards. Due to the very high interest charged on credit cards, defaulting makes the interest rocket out of hand leading to financial collapse.
There two types of bankruptcies that is valid for individuals. The Chapter 13 an individual is allowed to arrange for a reorganization plan, meanwhile, plan for new repayment terms to fit in with the income. This will enable you to retain your assets for as long as you honor your repayments. You prepare a plan that is appropriate for the court. If you do not revise your plan, then you liquidate. You must have enough income at your disposal to further your plan. If you do not have enough funds and you do not want to liquidate, you will be forced to move to Chapter 7.
Chapter 7 is referred to as liquidation. The court takes all your secured assets and entrusts to somebody to sell and distribute the proceeds to the creditors. It may look overwhelming but will relieve you of dischargeable debts. Your mortgage payments may not be current at the time of bankruptcy proceedings come to an end, this will force the bank to sell your house. For personal bankruptcy, it is imperative to keep auto loans and mortgages current.
Bankruptcy is not a clean slate as such; the court will maintain that you undergo credit counseling prior to the acceptance of your petition. If the court fails to honor your petition, then you are bound to undergo a magnitude of problems like bad credit record, securing employment and securing credit in future. It is wise for individuals to be equipped with the relevant information on the topic of bankruptcy so that they are not making decisions out of ignorance. They can find this useful information online.
There are many different types of bankruptcy that people can file for in case they cannot honor their debts for whatever reason. Bankruptcy laws and filings involving individual or domestic affairs are said to be personal bankruptcy. The laws that govern personal bankruptcy have been made tougher ever since President George W. Bush signed the bill into law.
The law is very elaborate on the complexities involved in personal bankruptcy and most of the issues are handled in Chapter 7 and Chapter 13 of the bankruptcy legislation. Individuals are usually required by law to get some counseling regarding the different types of bankruptcy filing and their long-term implications.
The most common form of personal bankruptcy is filed under Chapter 7 because its rules are less difficult to honor. However, people are in danger of losing their property under this chapter. While bankruptcy sometimes helps to recover debt by seizure of property, the laws are also intended to prevent punitive measures against the bankrupt individuals such as forcibly taking items that have no economic value.
This might include ordinary clothing, personal effects and so on that will have no significant impact on reducing the debt. In addition, items that one uses to earn a living should not be seized to recover debts because they might not be able to work. Thus, this might cause the prolonging of the insolvency problem.
Chapter 13 is a much better option although it is much more difficult for one to be approved when filing for personal bankruptcy. With this option, one can be granted bankruptcy and be allowed more time to repay the debt. During this time, none of the debtor’s valuable property, such a house, car, works of art, or jewelry will be in danger of being seized.
In addition, the creditors will have no right to keep pestering the debtor to pay the debt as long as the individual stays bankrupt. This period usually ranges between 3 and 5 years depending on the request of the debtor.
Once a person files for bankruptcy and the application gets approval from the court, it becomes into effect three months later. The bankrupt person might enjoy some benefits of bankruptcy, such as a peace of mind from his creditors. On the other hand, the negative effects will soon start to be felt as a result of a poor credit report.
When word reaches lenders such as banks and other lending institutions, it might be a little difficult to transact business normally. It might get difficult to obtain loans from these institutions while some might even restrict the use of credit cards by the individual concerned. Buying goods on credit for those who are used to the practice may prove to be impossible unless the banks choose not to let the bankruptcy report affect them. For example, getting an auto loan will not be an easy undertaking unless one has a co-signer to help them acquire the loan. For these reasons, one should be very careful when filing for bankruptcy.