Filing for bankruptcy is a legal process initiated when an individual or business is unable to repay outstanding debts or obligations. It offers a fresh start for people who can no longer pay their debts by forgiving debts that they cant pay. Meanwhile, creditors have a chance to get some repayment based on the individual's or business's assets available for liquidation. The bankruptcy process begins when the debtor files a petition with the bankruptcy court. A petition may be filed by an individual, by spouses together, or by a corporation or other entity. There are different types of bankruptcies, which are usually referred to by their chapter in the U.S. Bankruptcy Code:
- Individuals may file Chapter 7 or Chapter 13 bankruptcy, depending on the specifics of their situation.
- Municipalities—cities, towns, villages, taxing districts, municipal utilities, and school districts may file under Chapter 9 to reorganize.
- Businesses may file bankruptcy under Chapter 7 to liquidate or Chapter 11 to reorganize.
- Chapter 12 provides debt relief to family farmers and fishermen.
Before filing for bankruptcy, individuals or businesses must meet some requirements. They need to demonstrate that they can't repay their debts and also complete credit counseling with a government-approved credit counselor. The counselor will help them assess their finances, discuss possible alternatives to bankruptcy, and help them create a personal budget plan. Once the bankruptcy is filed, they will also be required to complete a course in personal financial management before the bankruptcy can be discharged. Under certain circumstances, both requirements could be waived.
When an individual or business files for bankruptcy, their creditors will be informed and must stop pursuing any debt owed. Once the debt is discharged, creditors cannot contact the debtor or attempt to collect the debt in any way. A discharge of debt is also permanent and final for all unsecured debt included in the bankruptcy filing. However, bankruptcies are considered negative information on credit reports and can affect how future lenders view the debtor.
