Is bankruptcy a judgment or a salvation?

Technological progress and the wide expanse of commercial activity allow many companies to be successful. But not everyone is lucky. Some are met with failure for certain reasons. Debts gradually build up, and it seems that everything is spent. But is bankruptcy really a complete failure? If we go deeper into understanding bankruptcy, we can realize that it is not only a total defeat but also an opportunity for a new start.

The parsing in bankruptcy basics will help to consider this unpleasant situation from all sides. It will help to understand what actions are necessary when this period occurs. It will also help to take measures for bankruptcy protection to avoid it in the future.

The Different Types of Bankruptcy Explained

Before considering bankruptcy itself, it is necessary to understand the types of bankruptcies. This is important because each type refers to a specific chapter, and the algorithms for actions will be different.

Chapter 7

This chapter is about the most common type of bankruptcy, when a citizen or entrepreneur declares that debts are present on unsecured debts and the individual is ready to solve this problem. Such debts can be considered various bills for certain services, like medical care or utilities. Also included here are ordinary loans from users that did not leave collateral for this and did not support the possibility of repayment.

In such a case, roughly speaking, the person agrees to the confiscation of property, transportation, equipment, belongings, securities, bank deposit boxes and real estate as payment of the debt.

Chapter 11

This is like a “life jacket” for a drowning person. Chapter 11 implies that the company or owner has no way to deal with the debt but wants to find ways to solve the problem and aims to keep the business going. In such a case, the court may allow the organization or company to develop a strategy to improve its financial condition and try to resuscitate the economy of the business. All debts will be temporarily set aside, and, under the supervision of the relevant authorities, the business will have a chance to recover.

Chapter 13.

This chapter deals with the situation of those individuals who are quite capable of paying their debts but, for certain reasons, do not do so. In such a case, filing for bankruptcy helps introduce additional schemes for a more gentle way of repaying debts. The most common is to determine or extend the time limit on the discharge of debt.

There are also chapters that deal with bankruptcy. But these relate to more individual conditions and situations, such as Chapter 12 on the bankruptcy of fisheries or industrial-scale farms or Chapter 15 on enterprises that have industrial facilities in several countries. In such a case, a more detailed review and examination of the case is required.

How to File for Bankruptcy: A Step-by-Step Guide

Bankruptcy is not always the only option. Very often, the creditors agree to negotiate and can offer alternatives so that each of the parties benefits as much as possible. But once an individual or company has decided to file for bankruptcy, it is necessary to prepare for it. This short guide does not take into account the nuances, but it will help to be aware because the bankruptcy filing process does not begin with the application.

Document Gathering. Before declaring bankruptcy, a person needs to gather all documents about income and expenses, file a credit history inquiry, and obtain a statement of financial status from the bank. Also added to the folder should be the presence of other loans, perhaps bills for taxes, utilities, or medical bills paid or owed. The more transparent the financial situation, the better the chances of a favorable review.
Training. The Department of Justice provides a list of agencies that teach financial literacy and bankruptcy processes and may help the debtor find other ways to remedy the situation. Training is a prerequisite for filing bankruptcy.
Filling out paperwork. This process involves filling out about 20 different forms. Depending on the type of bankruptcy, the individual will have to fill out about 70–100 pages. People are advised to contact specialist lawyers who will advise on how to file for bankruptcy and help with this. It is also possible to use regional legal aid on a free basis. But it will not be as effective as a paid specialist in the field of financial law.
Registration Fee. Before the case is taken up, an individual or business must pay a fee. Depending on the Chapter, the amount can vary, often it is a little over $300. Even this can be taken in installments if the individual does not have the ability to pay it all at once. There is an exception where payment of the fee can be waived altogether. This is for those whose financial condition is worse than 1.5 times the federal poverty line.
Copying everything prepared. Yes, this may seem strange, but everything prepared previously needs to be created paper copies. All of the paperwork will still be needed to further the case.
First visit to the court. This step involves filing a bankruptcy petition, all completed forms, and a fee bill. At this time, all documents from step #1 MUST NOT BE FILED. The court clerk will take these papers, file the petition and issue a sheet with the following: the case number, the trustee on the case, the date to meet with the trustee and any additional information that the client needs.
Communication with the trustee. When the details of the trustee are known, the client needs to send/transmit all the papers collected, and provide a number of additional ones to the trustee if requested. It is important here not to be snippy and to be open to get a preliminary positive assessment of the case.
Meeting 341. This is a formal meeting between the individual who is filing for bankruptcy, the trustee, and the creditors. This is where identities, case status, situations, and everything necessary for the case to be heard will be confirmed. Often, a meeting date is set a month after step #6.

This is the basic algorithm. Some steps can be supplemented depending on the bankruptcy chapter and the individual situation of the client or company. It is also worth noting that in most cases this process involves reducing debt obligations, increasing the time period for fulfillment and only in some cases can it be a complete forgiveness of debts.

The Role of the Federal Court in Bankruptcy

The Federal Court in Bankruptcy is the official representative of the law that handles bankruptcy cases exclusively. Statistics show that, in almost all cases, the consumer is the initiator of the bankruptcy filing.

The main task of the United States courts in bankruptcy cases is to settle the relationship between the parties, so that each party can get the expected or close-to-good result.

Two basic schemes of action can be applied here: reorganization or liquidation.

Reorganization

This is a situation when a person, enterprise, or organization can get a postponement of debt repayment, improving conditions in terms of financial burden. The debt will be paid off eventually, but consumers will receive a “respite window” and will be able to recover, improve their financial condition, and fulfill all the terms of the loan. The plan of action will be evaluated by the court and specialized authorities to minimize all risks.

Liquidation

The consumer will lose those that will be necessary to resolve the situation. Their debts will be paid as much as possible through confiscated property, financial assets, real estate, machinery, and other things. If it is not enough, the balance will be forgiven. In other words, it can be called “life with a clean slate”. Each case is individual, opportunities, and prospects are different for everyone, so it is difficult to say clearly which method will be applied.

Impact of Bankruptcy on Your Credit Score

After declaring bankruptcy, the credit rating will drop significantly. The United States has a system of credit by score called FICO. This is an indicator of how people know how to manage their finances and how reliable they are in paying back debts. Customers with no problems, delays, or court conflicts have an 850 score. Anyone who has encountered issues has a much lower one, and it could even be 300. The lower position means that no home loans, car loans or even standard credit cards can be obtained. Except at exorbitant interest rates. To remedy the situation, a person needs to have no such financial problems for the next 10 years. This can also be achieved earlier if you follow a few tips:

Open a card with guaranteed protection. This is a special card that will require the holder to deposit a certain amount of money into the account. The credit limit will be equal to that deposit. It doesn’t sound reasonable, but yes, this account helps to improve credit scores.
Pay your bills on time. Remember to pay off all outstanding bills, taxes and other debts on time. This won’t make an instant miracle with the rating, but it will help reduce the bankruptcy impact on credit.
Discharge other debts. Bankruptcy will help solve global problems, but various small active debts are waiting to be paid. Do this in a stable and timely manner.
Fragile Rating Improvement. After 2–3 years from the date of bankruptcy and with an excellent credit history, banks may start issuing unsecured credit cards to a client.
Educate yourself. Take out a small loan from your local bank and just keep it with you. Pay it off on the dates specified without delay. The credit bureau will note this as responsible borrowing and put a few extra points on the year.

Be careful! The credit bureau is a government organization, and no private company is able to influence a resident’s score. All offers to improve your history for money are scams.

Protecting Your Assets During Bankruptcy

Bankruptcy does not always mean that the consumer must necessarily lose everything. As mentioned earlier, the court may apply a liquidation or reorganization scheme. In both of these cases, there is an opportunity to protect assets and not lose every last penny.

In the case of liquidation under the stroke may not fall some property that are received on another loan. Also, if the car, house, or office building is worth much more than the amount of debts, then after the sale and payment of debts, there will be some money left over. This will be returned to the consumer.

In the case of reorganization, bankruptcy asset protection is much easier to achieve. After all, the main task of reorganization is to help the client to restore stability, to turn a negative income indicator into a positive one. If guarantees are provided, development strategies are approved, and it is proven that debt obligations will be fulfilled, all assets protected.

Life After Bankruptcy: Rebuilding Financial Health

Everyone understands that bankruptcy will have a negative impact on the client’s rating in the bureau and on the availability of opportunities in the future. But life after bankruptcy is quite a normal, decent life. A person who has experienced such an episode needs a little time to recover. The following tips will help you recover faster:

Plan household expenses more carefully.
Make major financial transactions with more thought.
Make a plan of action for your life, setting desired goals for the next few years.
Take care of your credit history and rebuilding credit trust.
Attend free courses for financial health post-bankruptcy.

It is not excluded that in a few years after failure you will make an attempt to increase your finances again with credit and this experience will help you to be more successful in the future.

Bankruptcy Myths Debunked

There are many bankruptcy myths around this issue that can be dispelled partially or completely.

Bad history for 10 years

Bankruptcy will indeed show up on your credit history. The untruthfulness of the myth is that this can be corrected a little earlier. There are many examples where consumers have been able to recover and fully restore this as early as year 7.

Anything of value will be taken away

Fortunately for consumers, debunking bankruptcy myths will calm them down a bit. The fact of the matter is that every state has some exemptions provided by the court. This can apply to personal belongings, primary residences, retirement accounts, and more. Yes, there is a lot to lose, but it is not a total loss.

Not everyone can file bankruptcy

Bankruptcy truths are such that the laws do not like to be circumvented. There is a certain percentage of people that speculate bankruptcy for their own gain. Bad history does not scare them, and various schemes of deception have been known for a long time. Therefore, in order for a consumer to be able to declare bankruptcy and receive this status with a decision, it is necessary to meet certain requirements.

Bankrupt one — bankrupt the whole family

There is a popular belief that if one spouse files for bankruptcy, the second spouse will automatically lose everything. In fact, however, this may apply to property that was acquired during the marriage. Bankruptcy truths have also already been voiced about the second myth. Ultimately, the court will look at all parties and their nuances. The mistake of one should not be paid for by the other. If such a situation has arisen, you clearly need the help of a specialist. But the myth itself is credible only under certain conditions.

Bankruptcy vs. Debt Consolidation: Making the Right Choice

The terms bankruptcy and debt consolidation are related to the topic of finance and help consumers solve financial problems. But it works on different principles and should not be compared.

The fact is that bankruptcy involves closing debts by selling property, valuables, assets and more. In simple words, things are taken away, and debt is written off. Debt consolidation helps to cope with several loans at the same time, or with one that, for certain reasons, has become unaffordable. The following algorithm is envisioned here:

The sum of all debts is summarized
A new loan is opened for the total amount
All the original loans will be repaid
Consumers pay off the new loan, which overlapped several old ones.

Why is it profitable? The fact is that when a consumer has several loans, each of them is subject to interest. When everything is merged together, the interest will be one on the total amount. In comparison, this can be more favorable than numerous small debts. Also, the interest may be further reduced and the time period for repayment extended if the guarantor for accomplishing the consolidation is a pledge of securities, assets or real estate.

Why is this not always used? If the consumer’s financial condition has deteriorated and consolidation is used, there is a risk of losing everything that was put up as collateral with no recourse for protection or exclusion. The process of consolidating multiple loans itself may be of little or no benefit at all, incurring unnecessary additional costs. Therefore, in choosing between bankruptcy and consolidation, it is better to turn to specialists who can help with debt management options.

The Psychological Impact of Bankruptcy

Bankruptcy’s psychological impact is bound to leave a negative trace for several future years. A person may be depressed for some time and feel apathy and hopelessness. But here it is necessary to understand:

No one is immune from their own mistakes
There is no need to be ashamed of bankruptcy
Declaring bankruptcy is not a punishment, but a way to get out of a “deep hole”
It is a way to start life from a new starting point
Use the experience of the past to avoid problems in the future

The negative emotional effects of bankruptcy will be erased from your memory after some time, but it will be one of the most valuable life lessons that you will use for yourself and be able to share with others. Perhaps after some time you will try to become successful in business again, or you will just be proud to remember that it happened, and you have successfully passed it.

Conclusion: Empowering Yourself with Knowledge

For anyone in life or business, there may come a time when the threat of bankruptcy looms. This is not something to be afraid of. Even a little knowledge of bankruptcy makes it clear that it is one method of solving problems. In some cases, as in the method of reorganization, bankruptcy can be equated with financial empowerment. The bankruptcy protection conclusion is that it only sounds scary.

Frequently Asked Questions About Bankruptcy

Asking bankruptcy questions is a normal practice in the face of the unknown. If a consumer is likely to face it, it is better to know everything in advance. Sometimes it helps people become more courageous and confident in their decisions. A little analysis has helped to gather some of the most popular bankruptcy FAQs in this article.

Do people with bankruptcy status lose everything?

No, it is not a punishment or a complete confiscation of property. It is a help to cope with unsolvable problems. Plus, the law provides prohibitions and protections for property that cannot be seized.

Who will know about this?

In reality, only the court and creditors will know about it.

Can my family be harmed by bankruptcy?

Only if family members have joint accounts. There may also be other aspects that will partially affect spouses and family members.