Bankruptcy is one of the oldest protections of the law, dating back to the year 1800. It is protected by the United States Bankruptcy Code, which comprises several chapters specifying the forms of bankruptcy and the terms and conditions of each of them.
The procedure to file for bankruptcy is known as a petition for bankruptcy and provides a lifeline to people left in vulnerable conditions. The main idea of these laws is to give a second chance to citizens and companies so that they can continue with their financial obligations.
Depending on the type of bankruptcy in which a person is left, they will have access to specific lenders and financial benefits to vindicate their stability. A path is opened to liquidate existing debts, and a reasonable payment schedule is defined.
Filing for bankruptcy
Filing for bankruptcy is understood as a way to help a debtor get rid of their debts. When a person becomes bankrupt, many of their obligations disappear. However, those related to child support, alimony, student loans, and criminal restitution remain in the event of a bankruptcy filing.
To protect themselves against this type of “lifeline,” some companies and lenders establish agreements with the debtor to maintain payments, even in the event of a bankruptcy filing. Although this is a relief for the debtor, it will not wipe out all debts.
The estimated time to file for bankruptcy is when a person has exhausted all financial liquidity. Under this scheme, you receive some protection. The U.S. Bankruptcy Code establishes different types of bankruptcy, and each of them has a different timeframe, process, and outcome.
Bankruptcy Options
The U.S. Bankruptcy Code provides for three types of bankruptcy. They fall under Chapters 7, 11, and 13; however, the most common are Chapter 7 and Chapter 13.
Chapter 7
Chapter 7 is a type of bankruptcy where debtors wipe out their financial obligations and are granted a fresh start. To file for bankruptcy under Chapter 7, you must pass the “means test,” which is designed to show to a bankruptcy court that you meet all the requirements for debt relief because your income is not sufficient to pay off your debts.
Chapter 7 wipes out the type of arrears known as “unsecured debts”. These are the ones related to credit cards, medical bills and personal loans. However, this alternative does not save you from specific responsibilities such as child support or alimony; At the same time, student loans are not paid when there is undue hardship; in any other case, you must keep your financial commitments.
When the debtor has non-exempt assets, Chapter 7 allows the sale to pay certain debts. However, most citizens’ assets are protected and are not intended to be sold.
How long does it take to file for Chapter 7 bankruptcy?
The time may vary, depending on the case, but the general estimate is that it takes between four to six months for the court to determine whether or not you qualify for protection under the law.
Chapter 13
It is a type of bankruptcy intended for individuals and its name is due to the fact that it is collected during all the statutes of Chapter 13. This is similar to the conditions of Chapter 7 but with longer terms. Unlike the previous one, it does not eliminate debts but offers a payment plan.
This chapter establishes a strategy with more comfortable monthly instalments that allows the debts to be paid in three to five years. This becomes a more attractive alternative for those with large debts because it will enable them to reorganize their payments.
You can opt for this modality if:
- You have income over those established by Chapter 7
- An asset secures the debts
Chapter 11
Unlike the previous two, Chapter 11 aims to manage the bankruptcy of companies when they are unable to pay and seek ways to reorganize their debts to continue with their liabilities.
It allows companies and corporations to continue to operate with a “pause in the payment of their debts” while they restructure. The other two chapters seek the total or partial termination of a company’s activities, but the purpose is to maintain its operations.
The debtor puts its debts on hold from when he delivers the paperwork until the new payment plan is established. If the interested party cannot reorganize their debt and receive a new payment strategy, this process begins to run under Chapter 7 rules.
Under these rules, small, medium and large businesses within the United States and sole proprietors and partnership owners can be protected. It is estimated that this is the most complex form of bankruptcy because you must discuss it with your creditors and reorganise your debts. According to data, between 10 and 15% of the companies that file documents achieve a successful reorganization.
Like Chapter 13, these laws can take three to five years to file for bankruptcy. In any case, we recommend that you speak with an attorney to determine which of these three alternatives best suits your case.