Bankruptcy: An Introduction

Bankruptcy seems like a scary concept. It certainly carries a heavy stigma within society. But is it the big, bad monster it seems? The answer may surprise you.

In the past, when a borrower could not pay his debts, he and his family had everything stripped away and could even be placed into servitude. As societies evolved, it became clear that placing people into slavery for their inability to pay would not inspire economic growth. What could a nation do to encourage people to continue participating in the economic market while dealing with unpaid debts? The United States found a unique answer… bankruptcy.

Bankruptcy is a process by which individuals, families, and businesses can eliminate or repay some or all of their debts. This process is guided and protected by the federal bankruptcy court. Bankruptcy acts as a means for individuals and businesses to not only reduce or wipe out past debts, but also restructure their finances so that they can start again with a “clean slate”, all while making more financially sound decisions in the future. For this reason, bankruptcy is also known as “debt restructuring”. There are two basic types of bankruptcy: “liquidation” and “reorganization.” For individuals, “liquidation” is considered Chapter 7 Bankruptcy while “reorganization” is Chapter 13 (of Title 11 of the United States Code).

Chapter 7 allows for individuals who qualify to discharge (eliminate) most of their debts. This is accomplished by liquidating non-exempt assets to settle current debts. The process is relatively straightforward. Essentially, each state has a list of items (e.g. a home, a car, most personal property) that are exempt from the bankruptcy process. When you file a petition for bankruptcy, you are appointed a bankruptcy trustee. This trustee will usually assist in the process of identifying exempt property and selling non-exempt property. The “liquidated” property proceeds will then be distributed to your creditors in exchange for wiping out most debts. It is important to note that some debts, most famously student loan debt, cannot be eliminated through bankruptcy.

Chapter 13 operates as a repayment plan and financial reorganization. Debtors who file for bankruptcy under Chapter 13 work with the bankruptcy court, advisors, financial counselors, and attorneys to develop a repayment plan, which is then filed with the court. The plan details every debt owed by the borrower, as well as financial income and property ownership. The essential idea is that instead of losing non-exempt property, you create a repayment plan to pay back debts based on your income that is sustainable and fair to all parties.

Are you struggling with financial debt? Have you begun to fall behind on payments? Do you receive harassing phone calls all day and night? Have you received threating letters about foreclosure or other means of financial collection? There is a light at the end of the tunnel. After filing a bankruptcy petition, a bankruptcy court will issue an “automatic stay” which provides notice to all creditors you list on your petition and forces them to discontinue collection efforts while the court handles your matter. At the end of the bankruptcy process, creditors receive a letter that the matter is closed and you no longer have to pay your debts (if the debt was discharged).

The American system of bankruptcy acts as a life preserver to those individuals and businesses that find themselves in financial troubles too deep to overcome alone. It allows a debtor to effectively remove or reduce their debts and “start over” financially. So the next time you hear the word “bankruptcy”, don’t cringe. Think to yourself, “Now that is an incredible and innovative American solution!”

If you are facing financial crisis, know that you don’t have to face it alone. Give us a call at (704) 537-1400 to set up a consultation to meet with our attorneys and discuss your options today!

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