Everything You Need To Know About Bankruptcy

OlufisayoJanuary 7, 20200962 views

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Bankruptcy is a business owner’s worst nightmare. Whenever you file for it, you’re admitting that you cannot repay the debts that you owe. However, do you really know what goes on when you file for bankruptcy? If you’re curious about finding out, then keep reading!

What Exactly Is Bankruptcy?

Bankruptcy is a status that many of us would rather not have as it’s considered a badge of shame for many. “Why is this the case?”, you might be wondering. This is because the eyes of the big three credit companies, Equifax, Experian, and Transunion are always watching for people who don’t repay their debts. They compile the reports of many loaning organizations to create the credit profile of an individual.

If someone fails to pay a debt, they will end up getting a mark or report on their credit reports which reflects on their credit score. Your credit score is a numerical value that many companies will use to gauge whether they will lend you money, let you buy a new home, and many more. It can even dictate the terms of your loan. However, these non-payment marks are minuscule compared to bankruptcy on your credit report.

Bankruptcy is a massive red flag on your credit reports that will stay there for over seven years if you ever file for it. Your credit score will take a nosedive and you’re going to have a difficult time recovering from it. This is why bankruptcy tends to be a final resort for many individuals or business owners who can no longer pay the debts that they owe. If you file for it, your credit score is going to end up suffering and it will keep you from getting any new loans, new credit cards, and even mortgaging a new home.

The Different Types of Bankruptcy You Can File

Bankruptcy filing can come in several shapes and forms, with some being better than others. Some organizations will also benefit more from different kinds of filings. The main types of bankruptcy filings you’ll be facing are the following:

Chapter 7

This type of bankruptcy is mainly used by individuals. The main idea behind this specific chapter of bankruptcy is to liquidate and sell assets so that they can repay their debts. Usually, the target for liquidation are non-exempt assets that usually include leisure and excess assets. Item collections and extra vehicles come to mind here.

Chapter 11

Chapter 11 is mainly used by businesses. Its primary purpose is to reorganize a failing business in order for it to start generating profits again. This can come in the form of various new promotions, advertising, new services or anything of the like to start creating profits once again.

Chapter 13

The target of this chapter are people who have too much income to qualify for chapter 7 bankruptcy. This is less of a type of bankruptcy, but rather a wage earner’s plan that lets an individual pay their debt over an extended period of time.

These different types of bankruptcy benefit each type of entity or individual differently. For example, PDQ Staffing is owed several hundred dollars by RDT company for hiring one of their candidates but they file for bankruptcy. RDT is going to file a chapter 11 because they’re a business, and not an individual and this lets them recover and eventually repay their debt to PDQ. However, if RDT is owned by a single individual, they can file for either a Chapter 7 or 13 depending on their income and they can sell their business off to pay off their debt.

The Silver Lining of Bankruptcy

It doesn’t have to be all bad though. Bankruptcy might be a badge of shame, but it at least has its use. It lets individuals who are too far gone into debt a second chance in life. Bankruptcy resets most, if not all, your debts back down to zero so you can make better decisions.

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