Although things may be slowly improving, the world economy is still on a knife edge right now and businesses are still finding trading conditions tough. Many people have been made redundant in the past year, and when this happens there is always a corresponding increase in the number of people who file for bankruptcy.
Of all the types of bankruptcy available, chapters 7 and 13 are the most common. Whilst an individual may prefer to file under chapter 7 and thus, after the sale of all their assets, emerge debt free in many cases, some businesses prefer to file under chapter 13, which, if agreed with the court, allows the company to continue trading with no sale of assets. This is used when a business has short term financial problems, but the longer term future looks more promising.
However, not everyone wants to file under chapter 7 and lose everything, including their credit rating. OK, a credit rating is badly affected by a chapter 13 bankruptcy too, but not as badly as a chapter 13 which stays on ones credit record 2 years less than a chapter 7 bankruptcy.
The point of a chapter 13 bankruptcy is that a business may be struggling to make its financial commitments, but can perhaps see that things will improve in the short term. By filing under chapter 13, no assets are sold, and in the case of a business, it can keep trading.
The purpose of a chapter 13 bankruptcy is to recover as much, if not all, of the outstanding debt owed to creditors. This is done by the business or individual agreeing to a “repayment plan” that must be adhered to, over a 3-5 year period. This plan is implemented with the agreement of the creditors, and allows the business to move on.
Providing the individual or business keeps to the plan, they are protected from their creditors who cannot chase them for payment of debt included in said plan.
It used to be that people and businesses would file for chapter 7 as an “easy option” to become debt free in one fell swoop. However, a means test is now used to ensure that anyone who can afford to repay their debts, with a little reorganisation of that debt, does so. If it is found that they can, then they have to enter a repayment plan under a chapter 7 filing.
Bankruptcy however, should always be an absolute last resort. All other possible avenues should be thoroughly explored before taking this type of action.
Before declaring yourself bankrupt, it’s very important that you ask a professional adviser concerning your financial position. This is because declaring yourself bankrupt has serious consequences for you credit rating and general financial health in later years.
