The American legal system has two basic forms of bankruptcy: liquidation, and restructuring. Liquidation is a process where the court sells a debtor's non-exempt assets and gives the proceeds to creditors. Once the sale is over, all of the debts from the filing are done, even if there is a significant unpaid amount. Chapter 7 bankruptcy covers liquidation.
Restructuring is a process where the court adjusts the debt total to a lower amount in exchange for the debtor agreeing to pay in full within three to five years. Once they complete the payment plan, the court wipes out the debts and the debtor keeps their assets. Chapter 13 bankruptcy covers restructuring for most individuals and Chapter 11 covers it for businesses and some individuals with debt loads in the millions of dollars
Which approach is the right one for you, though? Let's look at how you can decide between liquidation and restructuring.
Determine if There's a Choice
You may not have a choice. If a judge determines someone has too little money and can't fulfill a payment plan, they won't let them restructure their debts. Likewise, a judge might determine someone can pay and not let them liquidate.
It's prudent to meet with a bankruptcy law attorney first. Bring your last years' tax returns and your last few months of payslips, too. Make note of what your major outstanding debts are, also. The attorney can then review the numbers and give you a better sense of whether you're eligible for either type of bankruptcy.
Retaining Assets
A big deciding factor for many people is whether they want to retain certain assets. It's nearly impossible, for example, to hold onto a mortgaged house in Chapter 7. Similarly, someone who doesn't have any meaningful assets may want to file for Chapter 7 because it is quicker and usually eliminates more debts.
Notably, this doesn't guarantee that filing Chapter 13 will let you keep a house under a mortgage. However, it may allow you to restructure the mortgage. Bear in mind that restructuring may accelerate payments if you're still in the early years of paying.
Exemptions
Each state has its own laws regarding what is exempt from the liquidation process. Generally, daily essentials like a reasonable vehicle, clothes, furniture, and dishes are almost always exempt. You might also be able to claim an exemption for a primary residence if you own it outright. Note that exemption is a non-issue in restructuring because the goal is to keep the assets. In cases such as these, a bankruptcy law attorney can help.
Share24 June 2021
When I was a child, I regularly visited a local department store. At this lovely business establishment, one could purchase many items including clothing, shoes, and even hotdogs. Sadly, due to competition and other factors, the store closed its doors for the last time several years ago. If the owners of the store had considered bankruptcy options, they might still be meeting customers’ needs today. On this blog, you will learn how to resurrect your business with available bankruptcy alternatives. Regardless of whether you choose to liquidate your assets or reorganize your entity, the opportunity to remain in operation might be an option for you.