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Main Dictionary B


Bankruptcy is the legal procedure of releasing a person or business from paying its debts on the base of the debtor application (more common) or creditors' application (less common). All the debtor's assets are registered and valued so they can be used to pay off a part of the debt.

The concept of bankruptcy

A bankrupt is a person or business that has applied for bankruptcy, a situation in which there is no financial muscle to pay debts or loans, where the debts are discharged by assets available for sale. Any bankruptcy issues in the U.S. are heard in federal courts by bankruptcy judges. In general, bankruptcy is beneficial for economy by keeping money circulating at a faster rate, because it gives people or businesses access to get a credit and provides creditors with a part of the payments on the debts. Once a bankruptcy application is approved, the debtor is discharged from the debt.

Types of applications for bankruptcy

There is Bankruptcy Code in U.S., under which you can apply for bankruptcy under one of the chapters. The most common reasons for applying are Chapters 7, 11, and 13. Bankruptcy application is a fee-based process and the cost depends on the type of bankruptcy you are applying for.

Chapter 7. It is based on the selling of the debtor's assets to pay off the debt. Any assets that can be sold are used to pay off debts, including unsecured debts (credit card balances, medical bills, etc.). Chapter 7 bankruptcy information will remain in your credit history for 10 years.

Chapter 9. This chapter is suitable for municipalities (cities, villages, towns, etc.) in a difficult financial situation. They are allowed to continue to operate while developing a payment plan and selling assets to pay off debts.

Chapter 11. This chapter is for businesses that want to continue to develop, but need to reorganize it, shape a profitability improvement plan, explore new ways to maximize income and minimize expenses.

Chapter 12. It was developed to help agricultural households that can continue to operate, but must provide a payment plan to repay their debts.

Chapter 13. If you cannot apply for Chapter 7 bankruptcy (you have a high income), you can apply to have your debts discharged by salary earners. This chapter allows individuals and businesses with a steady income to make manageable repayment plans (in installments). These debtors do not have to sell their assets to pay off debts that they owe to creditors. Chapter 13 bankruptcy information will stay in your credit history for 7 years.

Chapter 15. If creditors, debtors, assets and other parties are located in different countries, this type of activity is international and the bankruptcy application for it is applied by the debtor's residence state.

Bankruptcy Release

When a debtor receives approval on a bankruptcy application, he or she no longer owes debts, and creditors are not allowed to collect them by any way after the discharge order takes force.

But tax bills and all things not mentioned by the debtor, personal injury debts, state debts, child alimony or child support payments can’t be discharged. In addition, any creditor can enforce the debtor's property if the mortgage is still valid. Creditors receive notice and can argue, resulting in an adversarial process to collect the debt or enforce the liens.

Pros and cons of bankruptcy

Bankruptcy can temporarily solve debt problems and help you keep your house or business, but it can complicate getting a loan or mortgage. If you apply for new debt (credit card, car credit, or mortgage), creditors or lending institutions will have access to information about the bankruptcy or debt discharge.

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