'Bankruptcy' is explained in detail and with examples in the Economics edition of the Herold Financial Dictionary, which you can get from Amazon in Ebook or Paperback edition.
Bankruptcy is a term that refers to the elimination or restructuring of a person or company’s debt. Three principal different types of bankruptcy filing are available. These are the personal bankruptcy options of Chapter 7 and Chapter 13 filings, and the business bankruptcy restructuring option of Chapter 11.
Individuals avail themselves of Chapter 7 or Chapter 13 bankruptcy filings when their financial situations warrant significant help. With a Chapter 7 filing, all of an individual’s debt is erased through discharge. This provides a new start for the debtor. Due to changes in laws made back in October 2005, not every person is able to obtain this type of total debt relief any longer. As a result of this new bankruptcy law, a means test came into being that prospective bankruptcy filers must successfully pass if they are to prove eligibility for this kind of bankruptcy relief.
The net effect of this new test is that consumers find it much more difficult to qualify for total debt elimination under Chapter 7. Besides the means test, the cost of bankruptcy attorneys has now risen dramatically by upwards of a hundred percent as a result of the new laws. Before these laws went into effect, Chapter 7 filings represented around seventy percent of all personal filings for bankruptcy. Chapter 7 offered the individual the advantage of simply walking away from debts that they might be capable of paying back with sufficient time and some interest rate help.
Chapter 13 Bankruptcy filings prove to be much like debt restructuring procedures. In these proceedings, a person’s creditors are made to agree to the repayment of principal and zero interest on debts over a longer span of time. The individual gets to keep all of her or his assets in this form of filing. The most common motivation for Chapter 13 proves to be a desire to stop a foreclosure on a home. Individuals are able to achieve this by halting foreclosure proceedings and catch up on back mortgage payments. Once a court examines the debtor’s budget, it will sign off on the plan for repayment proposed by the person. Depending on the level of an individual’s income, he or she may have no choice but to file a Chapter 13 filling, as a result to the 2005 law changes.
Companies and corporations that are in financial distress may avail themselves of bankruptcy protection as well. Chapter 11 allows for such businesses to have protection from their creditors while they restructure their debt. Some individuals who have a higher income level will take advantage of this form of filing as well, since it does not place income restrictions on the entity filing. It has been instrumental in saving many large and well known companies over the years, including K-Mart, that actually emerged strong enough from the Chapter 11 bankruptcy to buy out higher end rival Sears afterward.