What Bankruptcy Is and What it Means to You

In general terms, bankruptcy is a state in which a person completely lacks some type of physical or abstract property. When specifically applied to the financial world (the way in which it is most often used), bankruptcy refers to a legal process or state in which a person or corporation officially declares that he is unable to pay his outstanding debts.

While many of us cringe at the notion of declaring bankruptcy, taking this course of action does, in fact, have a purpose that is meant to help someone in serious debt get back on his feet. The primary functions of declaring bankruptcy are:

  • to help someone in serious debt financially “start over”
  • to repay, as much as possible, any outstanding debt to creditors.

Both individuals and businesses can declare bankruptcy. Keep in mind, however, that a person’s or business’ particular situation will determine the type of bankruptcy (i.e. the Bankruptcy Chapter) a person declares. While some types of bankruptcy allow debtors to only pay back part of what they owe, others will not include certain debts, meaning that you will still be held accountable for full repayment of these debts even after declaring bankruptcy.

If you find yourself in persistent serious debt that you don’t foresee yourself being able to repay, declaring bankruptcy may be the right choice for you. Not only will declaring bankruptcy prevent creditors from harassing you and/or garnishing your wages, but it will also significantly reduce your daily stress by giving you the opportunity to start a financially responsible chapter in your life.

In this section, we will take a closer look at different types of bankruptcy. Our articles will highlight which types of bankruptcy are best for which cases, including tips and warning about when to steer clear of other types of bankruptcy.

Voluntary Bankruptcy

Voluntary bankruptcy refers to a type of bankruptcy in which the debtor (whether an individual or an entire corporation) takes action to file bankruptcy when he recognizes his inability to repay his sizable debts. Most cases of bankruptcy fall into this category.
 
If you are currently in serious debt and are considering filing for bankruptcy, be sure to research all of your options before hiring a bankruptcy attorney and making an official petition. Understanding your options can help you decide if voluntary bankruptcy is right for you.

Involuntary Bankruptcy

In contrast to voluntary bankruptcy, involuntary bankruptcy is a type of bankruptcy in which a creditor starts a bankruptcy petition for a debtor in the struggle to get all or a portion of the money he is owed. If a creditor is worried that debtor isn’t going to pay him, he can file a petition against the debtor with the U.S. Bankruptcy Court.
 
If the court accepts the petition, the debtor has 20 days to object, which can lead to a trial if the court accepts the debtor’s objection. However, if the debtor offers no objection or the court rejects the debtor’s objection, then the process of an involuntary bankruptcy will proceed.

Bankruptcy Chapters

A bankruptcy chapter refers to the type of bankruptcy you want to file. Different bankruptcy chapters are meant to serve those in unique situations, ranging from a basic bankruptcy for an individual to a more complicated bankruptcy for a business. Here is a basic breakdown of how different bankruptcy chapters are applied:
  • Chapter 7: a basic, straight bankruptcy in which an individual or business liquidates his assets to pay his debts
  • Chapter 9: a bankruptcy for municipalities (cities)
  • Chapter 11: a bankruptcy that allows debtors to rehabilitate or reorganize their affairs to pay their debts
  • Chapter 12: a bankruptcy option for farmers, fishermen, etc.
  • Chapter 13: a bankruptcy of those with a reliable source of income.

Each of these bankruptcy chapters has its own associated pros and cons.

Resources

Avery, Wesley (n.d.). Facing Involuntary Bankruptcy. Retrieved December 12, 2007 from the Lawyers.com Web site: http://bankruptcy.lawyers.com/Facing-Involuntary-
Bankruptcy.html.

Nolo (n.d.). Bankruptcy FAQs. Retrieved December 12, 2007 from the Nolo Web site: http://www.nolo.com/article.cfm/pg/1/objectId/1FF752C2-0C80-4539-8B159557A55CC17D/catId/462A9501-9B21-4E09-A08C5A7B8AF51A79/213/161/FAQ/.