One out of every 55 households files bankruptcy every year in America, with Alabama having the most recorded bankruptcies in 2019. Personal bankruptcies reached an all-time high in 2005 during the Great Recession. The most common reason for filing bankruptcy is a loss of income.
But what is bankruptcy? Surprisingly, not many Americans are aware of all the bankruptcy facts. Bankruptcy is not a failure. While it’s not great for your credit score, bankruptcy stimulates the economy by helping businesses and people overcome their debts.
Let’s explore the ins-and-outs of bankruptcy along with five bankruptcy facts most Americans aren’t aware of.
What Is Bankruptcy?
Bankruptcy is a legal process to provide businesses or individuals freedom for their debts. At the same time, bankruptcy helps creditors to receive repayments through asset liquidation.
All bankruptcy filings are handled in federal courts and adhere to the U.S. Bankruptcy Code. A bankruptcy judge determines if a debtor is eligible to file and be discharged of debt.
Most cases are handled by a bankruptcy trustee, who is appointed by the United States Trustee Program of the Department of Justice. The trustee represents the debtor’s assets.
If bankruptcy is approved, the debtor will receive a discharge order and no longer be legally required to repay the debts listed on the document. The discharge dissolves the debtor’s personal liability towards creditors.
If bankruptcy is approved, the debtor will receive a discharge order. This means the individual or business is longer legally required to repay the debts listed on the document.
Bankruptcy is designed to benefit the economy by giving people and businesses a second chance while also repaying creditors and loaners. While bankruptcy can provide a fresh start, it stays on a financial record for a set number of years.
Surprising Bankruptcy Facts
Declaring bankruptcy isn’t easy. It involves a lot of moving parts. Before you move ahead on your bankruptcy plans, know the right information on bankruptcy. Here are five surprising bankruptcy tips not many people are aware of.
- There Are Different Types of Bankruptcies
Declaring bankruptcy is not a one-size-fits-all. There are five main types of bankruptcies in which a person can file.
Chapter 7 bankruptcy is intended for people with little to no assets. This bankruptcy liquidates nonexempt assets, like real estate, stocks, and bonds to repay debts. Unsecured debts, like credit card payments and medical bills, are disposed of. People with no valuable assets do not have to repay unsecured debts.
Chapter 11 bankruptcy provides solutions for businesses or individuals to work their ways out of debt. A chapter 11 bankruptcy attorney helps a business reorganize its assets to become profitable again. Chapter 11 bankruptcy helps a company learn how to cut costs, increase revenue, and continue conducting business while working in debt repayments.
Chapter 12 bankruptcy provides financial assistance to distressed farmers and fishermen to help them repay their debts. The plan provides payments over a three-year period.
Chapter 13 bankruptcy is for individuals who do not qualify for chapter 7 bankruptcy. Chapter 13 is referred to as a wage earner’s plan. It helps businesses or people create steady profits while adhering to a realistic debt repayment schedule. The courts allow debtors to keep all assets as long as creditors continue to receive payments.
Finally, chapter 15 bankruptcy is when a foreign debtor files bankruptcy in another country. Chapter 15 gives foreign debtors access to the US Bankruptcy courts. It is the least-known type of bankruptcy with very few cases. In 2017, there were only 82 chapter 15 bankruptcy filings.
- Bankruptcy Won’t Discharge All Debts
Bankruptcy can relieve you of most debts, but not all. Bankruptcy does not discharge debts that you are personally responsible for. Student loans are an example of debt that is usually not forgiven.
Creditors cannot pursue collection payments after bankruptcy has been approved. However, when a person or business files for bankruptcy, affected creditors are notified. The creditors can object and file a complaint before a deadline in order to recover any payments.
- Filing Bankruptcy Is Not Cheap
One important thing to note about bankruptcy is it isn’t cheap. A bankruptcy attorney is costly, but legal representation is crucial for a successful bankruptcy filing. Preparing bankruptcy on your own also includes substantial fees.
Bankruptcy fees are based on different factors, such as:
- Multiple sources of income
- Numerous creditors
- Filing for personal and business bankruptcy
- Repeat bankruptcy filings
On average, filing bankruptcy costs between $1,500 and $4,000.
- Bankruptcy Won’t Ruin Your Financial Future
There are financial consequences of bankruptcy. After filing, a person or business will have limited access to credit and loans. They will also pay higher interest rates for the next seven to ten years.
However, bankruptcy does not destroy your credit. While you will face limitations, you will still be able to get a credit card and maintain an average credit score. Bankruptcy may remain on your credit score for up to ten years.
If you responsibly manage your debts, your score will improve over time. Bankruptcy is not designed to permanently damage your finances. It’s meant to give entrepreneurs a second chance.
- Declaring Bankruptcy Doesn’t Mean You Failed
Filing for bankruptcy is not a personal failure. While it’s not ideal, bankruptcy is a financial remedy for people with limited alternatives. In many cases, bankruptcy can be better for your wallet as opposed to struggling to make payments. Bankruptcy helps a person or business regain control of their finances.
Many bankruptcy cases aren’t the result of poor financial management. About 57% of bankruptcies in 2009 were medical bills people could not afford to repay. Many bankruptcies are the result of inflation and stagnant wages as opposed to irresponsible spending.
Explore More Interesting Facts
Filing bankruptcy can be a complicated, long, and expensive process. But for some businesses or individuals, it’s the best financial option.
Now that you’re up-to-date on the latest bankruptcy facts, quench your thirst for knowledge. From breaking news to new music releases, we have the content you’re feining for.