By elmads

Do you remember these companies, Kodak, Blockbuster, Enron, General Motors, Chrysler, Toys R Us, and Thomas Cook? I guess some of you do remember it, while some doesn’t.

These are companies that went into bankruptcy. Some of you might be asking “If that is the case then why are some of them are still operating in this day and age? like General Motors and Kodak?”. That is because, bankruptcy doesn’t automatically translate to the closure of a company’s business operations.

There are various types of bankruptcy in this world, and each one has different ways into tackling the problem. There are different causes for a company to go under and have problems within their finances and operations, but one of the most popular causes of bankruptcy is debt. The inability to pay their liabilities to their creditors.

Moreover, bankruptcy is not only confined to companies, but also to individuals like ourselves. Some people tend to drown themselves in debt and create an unescapable downward spiral. This causes for their debt interest payments to shoot up, to the extent that even their salary alone cannot pay it anymore.

This is where filling for bankruptcy will be a wise decision that both companies and individuals can take. Remember, it would be smart to ask for help and assistance when we are caught up in a tight position.

The word Bankruptcy came from an Italian word “Banca” meaning Bench, and Latin word “Rupt” meaning Broken. Banking origins and its widespread practice started in 14th Century Italy, where merchants and bankers trade on benches in Venice. If a banker lost money due to poor investments and mishandles his/her banking operations, then the bench where that banker did his/her transactions was said to be broken afterwards.

Bench Broken = Bankruptcy.

The popular and most widely utilized method of bankruptcies in the US are Chapter 7, Chapter 11 and Chapter 13.

Chapter 7 Bankruptcy

It is known as the Liquidation Bankruptcy (applicable for both companies and individuals).

This is the most common form of bankruptcy. It is for persons who are deep in debt and wants to have a fresh start in life. It is a quicker and faster to start life a new.

In this bankruptcy, all of our unsecured debts will be washed away, eliminated and be erased in our name by the government. This just mean that we do not have any legal obligation to pay these debts anymore.

Unsecured debts are loans that do not have any collateral attached to it.
Examples of Unsecured debts are as follows;

• Credit card loans
• Personal loans
• Medical bill loans
• Student loans are included in this category, unfortunately the government rarely erases this kind of debt in a person’s name

On the other hand, secured debts will not be removed in chapter 7 bankruptcy.
Secured debts are debts that have a collateral attached to it.
Examples of secured debts are as follows;

• Home loans
• Car loans

This means that although the unsecured debts are removed, people who are under chapter 7 bankruptcy still needs to pay continuously for their secured debt obligations. Also, the government do not repossess all of their assets like homes, cars, cash in savings and/or investments, but it will still depend on the gravity of the debt and complexity of the case. The Trustee (A person who is appointed by the court to oversee your bankruptcy journey) live some of the their most needed assets to make sure that these people will still have money to survive their day to day lives.

Nevertheless, there are times where individuals who are under chapter 7 bankruptcy, will ask if they can sell their primary asset, like their car to reduce their debt. Sometimes the government will agree with this kind of request. The car goes away, so as their car debt.

Is chapter 7 bankruptcy for me?

It is time to file for liquidation bankruptcy if your unsecured debts are to much to handle anymore and if a financial advisor advised you so. It is always important to seek a professional advice before making a major financial decision most especially when it comes to bankruptcy filling.

There is no specific amount of debt that is required before you can file for chapter 7 bankruptcy. But the court will review your financial status and life status depending on the amount of your total household income (including the number of people in your home), or individual income if you’re single. The eligibility is most likely tied on the ratio of your debt and household salary.

This method of assessment is called the “Chapter 7 Means Test”

For example; A family with a total income of $110,000 with 7 children can qualify with this type of bankruptcy compared to a family with household income of $55,000 with only a child.

All in all, The Chapter 7 Means Test will depend on the total family income, to the number of individuals in the family, to the size of debt.

Is chapter 7 bankruptcy not for me?

This will be not for you if your household or individual salary can cover your debts within a few years. The US government will advise debt settlement between you as the borrower and your lender.

For instance; you have a credit card debt of $10,000 from a ELMads Bank (a made up bank only). You’ll be asking their assistance if they could either, lessen the total debt to be paid or if they can decrease the interest rate on that debt. Basically you will be having a negotiation with the bank about your debts. Henceforth, debt settlement.

Note: Filling for Chapter 7 bankruptcy costs money. I know right! unfortunately, this is how it works. We need to pay $335 for filling chapter 7 bankruptcy, then if we choose to hire a bankruptcy lawyer then we also need to pay for their fees which is usually more than $1,000 depending on the complexity of the case.

Also, people who are under chapter 7 bankruptcy are will not be able to raise debt capital anymore for 5-10 years.

Is chapter 7 bankruptcy for companies?

This is the company’s last resort for bankruptcy. This is the end of the line for them, this is because they will be mandated to stop all operations and go completely out of business. A trustee who is appointed by the court will liquidaite some, if not all assets of the company to use as a payment to the company’s creditors.

Chapter 13 Bankruptcy

It is known as the Repayment and Reorganization Bankruptcy, for individuals only.

Individuals who have higher salary pay and has a lot of debt will be advised to file for chapter 13 bankruptcy, instead of chapter 7.

In this type of bankruptcy, the trustee will not repossess any assets like property rather, the debtor must propose a plan how to repay their debts to their creditors. Usually the government will mandate a 3-5 years plan to complete the debt repayment. Hence, the repayment and reorganization bankruptcy.

This is a long debt repayment journey, which takes time, planning and actions. The good part about this is that the person’s assets will still be theirs and not be repossessed unlike chapter 7 bankruptcy.

The steps

• Proposal – Filling for Chapter 13 bankruptcy, which costs $310. Once approved the debtor needs to make a proposal on how to repay their debts within a 3-5 years span.
• Repayment – If the court agrees with the proposed plan, it will then go ahead into the repayment period. The creditors are not allowed to contact and harass anymore the debtor while he/she is under the chapter 13 bankruptcy. The creditors do not have any other choice but to follow and agree on what has been the approved plan by the court.
• All of the debtor’s asset will be retained, while paying their debts to their creditors.

Eligibility?

Unfortunately companies and businesses are not allowed to file for this bankruptcy, it is only for individuals and families. Nevertheless, an Entrepreneur can file for one only if they file it under their name and not under their business’ name.

Secured debts cannot exceed $1,184,200

Unsecured debts cannot exceed $394,725

The debtor will need to fulfil a credit counselling requirement under an accredited counselling agency.

Is chapter 13 bankruptcy not for me?

If you’re salary is not high enough to sustain the debt repayment and reorganization. Alternately, Chapter 7 might be a better option in this case.

Chapter 13 is a long and arduous debt repayment journey, most especially if there will be problems within the 3-5 years time period.

If a debtor is already in a chapter 13 bankruptcy and has encountered problems, the debtor can file for chapter 7 from chapter 13. This will only be approved by the court if they deem the reasons for the transfer are genuine and unavoidable.

Chapter 11 Bankruptcy

It is known as the Repayment and Reorganization Bankruptcy, for corporations only.

Chapter 11 Bankruptcy is the same as Chapter 13 Bankruptcy, both are for repayment and reorganization.

The only difference is that only companies can file for Chapter 11, while individuals file for Chapter 13.

Companies are still able to continue and operate their business like usual, while restructuring their debt in order for them to be able to repay their creditors.

To sum it up

Bankruptcy is a plead for help and assistance from the government. At times life will be hard on us that we will need to restart anew and learn from our past mistakes. In finance, that’s where Bankruptcy is an essential tool.

That being said, being aware that debt is the core reason of bankruptcy is important. It is double edged sword, which most companies and individuals fail to grasp. It is a detrimental to once financial health if not handled with caution and care.

The only way for us to make debt a proper weapon to achieve financial stability and leverage is to learn how to handle its power, to be financially educated enough.

Knowledge is my Sword and Patience is my Shield,

elmads

This blog is for informational purposes only and not a Financial Recommendation. Not all information will be accurate. Consult an independent financial professional before making any major financial decisions.