The term bankruptcy is used in the financial system for defining legal proceedings that take place as a result of an individual’s or a business’s inability to pay their dues to their lender. By applying for bankruptcy in court, the debtor expresses their inability to pay their dues anymore. The government can either forgive their debt or use their remaining assets to pay off the outstanding dues. Unfortunately, bankruptcy always leaves a scar on a person’s credit history. What this essentially means is that when a customer files for bankruptcy and the loan is forgiven, the credit report will hold that record for the next 7 years. Even if that customer starts doing a regular job and has enough money to apply for a loan, their bankruptcy record will lower down their credit score.
Some experts suggest that bankruptcy sometimes acts as a revitalizing factor in the economy. As interest rates go up and people lose their buying power due to the higher amount of debt installment, there is a supply surplus in the market. As a result, the economy starts to go down. Bankruptcy, on the other hand, relieves debtors of their outstanding interest payments, and although it affects their credit score, it also increases the buying power of the general population which eventually pulls the economy back on track.
Types of bankruptcies
Bankruptcies and in the United States and all around the world have varying types. Some bankruptcies allow individuals to pay off their debts using their exempt and non-exempt assets while other types of bankruptcies allow businesses to restructure their operations to start making more money and pay off their outstanding dues. Each type of bankruptcy is given a chapter name. The most commonly known types of bankruptcies include Chapter 7, Chapter 11, and Chapter 13 bankruptcy.
Chapter 7 Bankruptcy
Businesses or individuals who have no chance of repaying their debt any more can file for chapter 7 bankruptcy. In this type, the debtor is allowed to liquidate their assets from valuable coins to their second homes in order to pay off their debts. Assets secured against a loan facility are liquidated to pay off that particular loan, while other items are used to pay off unsecured loans like credit cards and personal loan. Some additional valuables that bankruptcy filers use to pay-off their dues include stocks, vehicles, bonds, and gold.
Chapter 11 Bankruptcy
This chapter of bankruptcy is primarily used by corporations and small businesses. Under chapter 11 bankruptcy, the court allows the debtor to restructure their business in order to earn higher revenue and pay off their dues using a loan payment plan. This saves a dying business from foreclosure and provides creditors with a hope to collect their loan amount over a period of time.
However, businesses that are filing for a chapter 11 bankruptcy must provide the bankruptcy court with a restructuring plan that proves their capability to revitalize their business. A restaurant owner for instance who is filing for chapter 11 bankruptcy needs to prove that they will improve their quality of food by hiring expert staff and renovate their dining area for attracting more customers to their restaurant. Once a bankruptcy judge is satisfied by the petitioner’s plan of action, they may allow the debtor to file for chapter 11 bankruptcy and continue their operation.
Chapter 13 Bankruptcy
This type of bankruptcy is filed by debtors who can afford a payment plan but cannot settle their outstanding dues on an immediate basis. The bankruptcy court will allow the debtor to keep all their assets if they can commit to a repaying their dues on time based on the payment plan devised by the court.
The bankruptcy proceedings conclude with either a denial of the debtor’s petition or release of a discharge order in favor of the debtor. The discharge order relieves the bankruptcy filer off their current financial obligations. This discharge of financial responsibilities may exclude tax charges and any liens marked on the debtor’s property against a secured loan. The discharge order does not take full effect in case the creditor files for an appeal in the bankruptcy court.
How to avoid bankruptcy?
From the sound of it, bankruptcy is quite an easy way to leave your debt worries behind. However, people who get their bankruptcy petitions approved in court may sometimes get more in return than what they bargained for. According to the latest bankruptcy laws, especially in the United States, bankruptcy filers need to attend mandatory credit counseling once the proceedings are over. Besides that, they need to ensure timely payments if a payment plan has been organized for them, especially in Chapter 13 bankruptcy. Lastly, it leaves a long-term effect on their credit report.
Therefore, it is always better to look for ways that can help you avoid bankruptcy in the first place. Here are some useful tips for people who fear they may be approaching bankruptcy in the near future:
Cutting down expenses – The first and foremost step that one should take to avoid bankruptcy is to cut on spending. These expense cuts should encompass low and high ticket items both. To minimize your interest payments every month, it is better to pay most of your purchases by cash, this will eventually lower down your monthly credit card installment. Next, you should consider spending on things that you actually ‘need’ rather than the things you ‘want’.
Instead of spending a lot of money buying expensive gifts for your loved ones, spend quality time to make up for these presents, they would cherish it more. Start driving a car that is more fuel efficient and cut down on luxuries that can easily be avoided. These may include:
- Weekly visits to the spa
- Dining at expensive restaurants
- Alcohol and cigarette consumption
Maximizing your income – To maximize your income you can take up an extra job if you are currently working part-time. If you already have a full-time job, add a late-night shift to your schedule so that you can pay-off interest that has accrued over time. This will give you some breathing space to organize your monthly budget and help you get back on track.
Professional help – It is always helpful to seek assistance from experts when you are in financial distress. They can always offer you some useful insights about managing your expenses based on the experience they have gathered from working with different clients over the years.
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