I was surfing around the Internet the other day and came across a web site that listed all the popular financial web searches for each state. When I checked out Delaware, which is where I live, I found Bankruptcy. Oooh..what a bad word, and I’m sad that this is the most popular search for my fellow Delawareans. So, I figured if they’re searching for it, perhaps I could write a little something about it. Let’s look at what it is and what it means.
Definition (courtesy of Wikipedia)
Bankruptcy is a legal process through which people or other entities who cannot repay debts to creditors may seek relief from some or all of their debts. In most jurisdictions, bankruptcy is imposed by a court order, often initiated by the debtor.
In layman’s terms, you can’t afford to pay your debts so a court appointed accountant can be assigned to you to help you sell any assets to pay off your debts. Insolvency is word often confused with bankruptcy. Insolvency simply means that a person doesn’t have enough money to pay their debts or that the total of their assets won’t cover the debt either. Bankruptcy is the formal legal process.
Popular Types of Bankruptcy
Chapter 7 – This is the most common form of bankruptcy filed by businesses or individuals. This is where a business or individual will liquidate all their assets to pay the debt.
Chapter 11 – This is a much more complicated form of bankruptcy where a business’ finances are reorganized, setting up new payment terms and usually reducing the amount of the debt. The business typically stays in business. Individuals could apply for this but it’s less common as it is more expensive than a Chapter 13 bankruptcy.
Chapter 13 – This is most popular in the United States. Only individuals can apply for this form (sorry businesses). Some of the debt may be forgiven, but a portion will need to be paid back. This usually lasts for 3-5 years.
There are other forms of bankruptcy but they are less common, so I chose not to include them.
Consequences of Bankruptcy
Yes, there are consequences of bankruptcy. Filing for bankruptcy can be expensive. Filing is about $310 plus any attorneys fees which can easily put you into the thousands. Also, when you file for bankruptcy, it’s made public. No, they don’t announce it in the paper, but it’s in the public domain for anyone to find who is looking for it. Let’s also not forget that trying to buy anything after filing for bankruptcy can be difficult. Especially buying a house.
Bankruptcy is not a fun word and I suspect it’s not a fun position to be in. It can be confusing, overwhelming, and intimidating. If you find yourself struggling to pay your bills and creditors really riding you, don’t just through your hands up and yell, “I declare bankruptcy”like Michael Scott in The Office. Get yourself organized. Get your paperwork together. Reach out to a financial advisor or coach and let them help you through the process. Often times there are options, other than bankruptcy, so do your homework and don’t be afraid to ask for help.