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What Does It Mean to File for Bankruptcy?
Bankruptcy is a legal proceeding in which a debtor declares their inability to pay back their creditors.
The general idea behind declaring bankruptcy is that it allows debtors a “fresh start” while offering creditors a way to receive some or all of their owed payment.
Although some debts are forgiven, filing for bankruptcy affects the debtor’s creditworthiness.
When filing for bankruptcy, secured debts are usually paid for by the asset “securing” the debt, while many types of unsecured debts can be renegotiated.
What Is Bankruptcy? The Three Chapters of Bankruptcy
There are three common types of bankruptcy known as “chapters” in the U.S. bankruptcy code, Ch. 7, Ch. 11, and Ch. 13, each with varying criteria and consequences.
Ch. 7 Bankruptcy
The most common type of bankruptcy is Chapter 7.
Chapter 7 bankruptcy is known as “straight” or “liquidation” bankruptcy.
It is designed to give a “fresh start” by discharging debts that cannot be repaid through the liquidation of the debtor’s assets.
Upon filing Chapter 7, a trustee is appointed to sell the debtor’s non-exempt assets and distribute the proceeds to creditors.
For individuals, the law exempts certain assets such as retirement funds, primary residence, tools for their trade, and personal vehicles from being liquidated to pay back creditors.
This pays back creditors some of what they are owed and protects individuals from having all of their livelihood taken from them.
Ch. 11 Bankruptcy
Chapter 11 bankruptcy is primarily for companies, allowing them a break on paying their debts in order to restructure, come up with new terms for paying their creditors, and become profitable again.
This allows companies to stay afloat while coming up with a new way to pay back creditors.
Chapter 11 is the most complex and expensive form of a bankruptcy proceeding and should therefore be considered after other options have been explored.
Ch. 13 Bankruptcy
Chapter 13 bankruptcy, known as a “Debtor in Possession” Bankruptcy, stands in contrast with Chapter 7 because it allows the individuals to keep from liquidating their property.
Chapter 13 creates a new, more affordable payment plan for the debtor to repay creditors, usually lasting 3 to 5 years.
Once the payment plan is finished, the remaining unsecured debts are discharged.
A: Chapter 13 bankruptcy will stay on your credit report for 7 years.
Chapter 7 bankruptcy will stay on your credit report for 10 years.
It is possible, though difficult, to remove it earlier by disputing any inaccuracies in your paperwork with the three credit bureaus (TransUnion, Experian, and Equifax).
Q: How Long Does Bankruptcy Take?
A: A chapter 7 bankruptcy case typically takes 3-5 months to complete.
A chapter 13 case establishes a repayment plan that usually spans the next 3-5 years.
You can move your case along swiftly and smoothly by reporting information as completely and accurately as possible in your paperwork and with your lawyer.
Q: Do Bankruptcies Show Up On Background Checks?
A: Bankruptcies appear on credit reports that may be accessed by an employer, but they do not appear in criminal background checks.
If your employer does conduct a credit report check, any bankruptcies that are less than ten years old will appear.
Any bankruptcies older than ten years will not appear.
Under the Fair Credit Reporting Act (FCRA) it is technically illegal for an employer to deny a prospective hire a position due solely to their bankruptcy.
Bankruptcies should not affect an employment background check.
Q: What Is Chapter 11 Bankruptcy?
A: Chapter 11 is a bankruptcy protocol that works by allowing the debtor to restructure their debts in order to pay their creditors.
Chapter 11 is almost always filed by corporations.
Restructuring debt can mean renegotiating terms such as the interest rates and even the amount to be repaid.
In most cases the debtor will continue operating their business to help pay their creditors.
To file chapter 11, you need to petition the bankruptcy court in the state where your business is based.
The best first step is to consult with an accredited bankruptcy lawyer.
Q: When Will Chapter 7 Bankruptcy Be Removed From Credit Report?
A: Chapter 7 Bankruptcy will take 10 years from when you file to be removed from your credit report.
A bankruptcy will also impact your credit score, though according to FICO the damage will be less significant to scores that were already suboptimal.