The B-Word
Regardless of scale and industry, there is one b-word that no company doesn’t want to be associated with. Bankruptcy is an experience that leaves businesses trauma on multiple levels. All of a sudden, uncertainty becomes the norm. Workers are thrust into unemployment, unsure if they can manage to find another job before the bills start piling up. Business owners become doubtful of their capability to pick up and start another; worse, they are compelled to file papers that would only serve to remind them of their failure. They begin to lose confidence in their capabilities to manage anything of value. They either take up their cross or succumb to their doom. Either way, bankruptcy is an ordeal nobody wants to face.
In 2021, the United States Courts’ official website reported over 434,540 bankruptcy filings. While the current year recorded only 370,685, (a fall of 11.4% from the previous numbers) these figures are by no means pleasant to see. They espouse curiosity from those who might be apprehensive and fearful that they might suffer the same. Worse, some may turn to judgment and speculate without due evidence.
But mind you, bankruptcies are not limited to businesses. They can happen to any organization, family, or even an individual. And while the situation might appear hopeless once you’re already in it, there are ways by which you can cope with it.
Let’s look at the different types of bankruptcies and how people can manage to keep their heads above them.
The 6 Types of Bankruptcies
Before delving into the types, a definition is in order.
Bankruptcy is a state wherein an entity is no longer capable of paying for the debts and loans accumulated. In certain territories, bankruptcies are required by the local court and initiated by the borrower.
That said, bankruptcy is a legal proceeding rather than a total state of financial depletion. While the term strongly implies the concept, bankruptcy is not an erratic state, (or a completely hopeless one at that) but a process that seeks remedies through the aid of an institution.
Divided into different ‘Chapters,’ each type of bankruptcy has a specific scope and set of remedies that entities can avail to help them navigate through their financial turmoil. The chapters refer to both actual chapters of the U.S. Code and the nature of each.
Here, we will separate the categories of bankruptcies into individual and business.
A. Bankruptcy for Individual
1. Chapter 7
Also called ‘Liquidation’ or ‘Straight Bankruptcy,’ Chapter 7 bankruptcy is the more common of the two individual bankruptcies. The local court appoints a trustee to oversee the liquidation of assets so the party’s creditors are paid off. Other remaining debts such as credit cards, medical bills, and the like. are written off. However, taxes and certain loans like student loans cannot be erased.
Depending on which state you live in, there are assets that the court cannot compel you to sell. For instance, necessities like shelter, car, and retirement accounts cannot be sold.
However, Chapter 7 bankruptcy cannot stop foreclosures. The best it can do is postpone it. People filing for a chapter 7 bankruptcy can keep their assets and personal belongings they still owe money on if they would reaffirm the debt. Then they must enter another loan agreement to carry on with the payments.
Do note that a majority of Chapter 7 bankruptcies do not usually involve assets. Most of those who file for them do not have any assets to give up.
Chapter 7 bankruptcy is only decided upon when the court sees that people cannot earn enough money to pay back their debts. The court decides through a Means Test wherein a Chapter 7 applicant declares their income in court so that it can assess it against the state average. The court will also look at the person’s disposable income to pay back an acceptable amount to creditors. Should the income be too low, the person filing for bankruptcy qualifies for Chapter 7.
People who file for Chapter 7 bankruptcy are required to attend a meeting with the creditors where they can ask the applicant questions about the state of his or her finances. Also, Chapter 7 bankruptcy stays in the person’s credit report for a decade. And it is only after 8 years that the person can file one again.
2. Chapter 13
The Chapter 13 bankruptcy reorganizes debts. The local court sanctions a monthly payment plan that allows the person filing for bankruptcy to pay back part of the unsecured debt and all the secured debt within three to five years.
The amount of the monthly payment depends on your income and the entire debt. The court sets a strict budget. If you filed for Chapter 13, the court will review your budget and set certain parameters for your spending habits. It might look intrusive, but the court implements the ruling to help you to pay what is owed promptly.
Chapter 13 lets the party keep their assets and pay for debts that cannot be included in the bankruptcy filing. It also stops a foreclosure in its tracks by letting the owing party time to update payments.
Parties can file for Chapter 13 bankruptcy if their unsecured debt goes below $419,275 while their secured debt does not reach $1,257,850.3. On top of this, parties filing for this type of bankruptcy must be consistent in paying taxes.
Chapter 13 bankruptcy stays on one’s credit report for seven years. It will take another two years for the person who filed it to be allowed to apply again.
B. Bankruptcy for Business
1. Chapter 9
Chapter 9 is a repayment plan catered to financially-distressed municipalities.
The municipalities are protected from their creditors as they undertake the development of the plan. Places like towns, cities, school districts, and the like may apply for Chapter 9 bankruptcy.
2. Chapter 11
Chapter 11 bankruptcy reorganizes a business or a corporation. The business does not close down but continues operating with a payment plan to cover its debt. The court, alongside the creditors, will be the ones to approve the payment plan.
Individuals deep in debt but have high-value properties and assets, are qualified to file Chapter 11.
3. Chapter 12
Chapter 12 has the court execute a repayment plan for family farmers and fishermen without compelling them to give up their assets or impose foreclosures on their property.
Compared to Chapter 13 bankruptcy, Chapter 12 bankruptcy has higher debt limits. It is also more flexible to adjust to the parties’ financial situation.
4. Chapter 15
Chapter 15 bankruptcy is based on the Model Law. The Model Law assists states in legally regulating corporate insolvency for companies and corporations with debts across states.
Chapter 15 takes up the provisions of the law up a notch with its provision of effective mechanisms to deal with insolvency cases across different countries.
Alternatives To Bankruptcy
If you are caught in a bind but think that filing for bankruptcy is too much, you can always resort to measures that allow you to pay for your debt no matter how large.
1. Take Care of Your Budget
Knowing what to prioritize in your monthly spending allows you to save some funds for repayment. Most of the time, when our spending goes unchecked, we buy things and avail of services that are not within our means.
Putting home maintenance and other basic needs like food and clothing will put things into perspective. By focusing on what matters, you can filter out everything else you might be spending on that bears no real value.
2. Look For Side Jobs
Looking for part-time jobs will serve you well as this will allow you to cover some expenses. Find a job that you can do for at least 4 hours a day so that you won’t have to stress yourself daily.
You can allot your earnings from your side job to debt repayment while your primary salary goes to your household expenses.
3. Sell Some of Your Belongings
You can always let go of some of your things at home that may only be taking up too much space. Assess everything and find things that are still functional but no longer serve you any purpose.
There Is No Shame in Bankruptcy
While the term bankruptcy might be daunting a term to hear, to some, it may even be more embarrassing.
However, there should be no shame in filing for bankruptcy regardless of the type. For what it’s worth, it shows that individuals and businesses are willing to accept defeat so they can ask for help and move forward.
