Filing bankruptcy is one of the most popular debt settlement options available to debtors. Creditors can use this method to recover bad debts while debtors can get a fresh start once the court declares them bankrupt. While this may seem like a win-win situation the process also has some disadvantages to all the parties involved. Read on to learn more about bankruptcy.
Types of Bankruptcies
Debtors have numerous bankruptcy options to choose from depending on a number of factors. Debtors who no longer have a reliable source of income may only qualify for liquidation. After the court certifies the bankruptcy petition a trustee will be appointed to sell all valuable assets of the debtor. The money which is recovered is divided proportionately amongst all creditors including the court and government. The debtor will in turn be forgiven of all debts except child support student loans and alimony.
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Business reorganization is another type of bankruptcy. Only profitable businesses qualify for this type of debt settlement. Instead of writing off the debt this type of bankruptcy makes it possible for a business to make regular monthly payments based on its average income. Creditors are always in favor of this option as opposed to liquidation because it gives them a better chance of recovering all their money.
Personal debt reorganization is a popular type of bankruptcy. It is meant for individual debtors. People normally seek this type of bankruptcy so as to get court protection from creditors and debt collectors. In order to qualify the debtor needs to have a job or a reliable income source. The court normally asks debtors to draft a repayment plan that can be sustained by their average monthly incomes. If certified the debtor will be required to send payments to creditors through the trustee.
Advantages of Filing Bankruptcy
Once the bankruptcy court declares a person bankrupt all debt obligations of the debtor will cease to exist. Creditors will have no legal basis to contact the debtor. In fact any direct communication between the creditor and the debtor will be prohibited. If creditors had already started to foreclose or repossess property the entire process will be frozen until the case is decided. This can give homeowners some time to get their affairs in order and reclaim their property. The main advantage of bankruptcies is the fact that almost all debts are forgiven. This can give a person a fresh start. When liquidation of assets is done the debtor has the right to retain all assets that are classified under the law as exempt.
Creditors also benefit greatly from the process. The issue of non-performing loans and other bad debts need to be settled as quickly as possible. Instead of writing off these debts creditors can petition the court to declare these debtors bankrupt. During the bankruptcy proceedings creditors will be able to recover part if not all of the money owed to them.
Disadvantages of Declaring Bankruptcy
Bankruptcy also has some disadvantages and it is important for debtors to consider all the demerits before they decide to go on with the process. One of the most significant disadvantages of filing bankruptcy is the adverse effect it has on the debtor’s credit scorecard. A bankruptcy entry can stay on the credit report of an individual for up to seven years. This will make it very difficult for a person to access low interest credit facilities from mainstream lenders. A bankruptcy entry may also deny a person a job opportunity if the potential employer decides to run a credit check. Renting a house or car will also become very difficult. The society is also known to stigmatize anyone who files bankruptcy.
While bankruptcy may make it possible for creditors to get their money back it often takes time and they rarely get all their money. They may also incur some legal fees during the proceedings. This will further reduce the amount of money recoverable from the debtor.
The advantages and disadvantages of declaring bankruptcy are important factors to consider when analyzing this debt settlement option.