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Bankruptcy Protection

When debtors are unable to repay their creditors, they can seek bankruptcy protection. While both businesses and individuals can opt for protection under the bankruptcy laws of the United States, there is a difference in the extent of protection received by them. For an individual, bankruptcy protection may involve either of two things:

• Cancellation of most of the debt and the sale of some assets to meet the rest of the liabilities.
• A structured plan to pay down the overall debt liabilities owed by the person.

A business might receive either of the following in a bankruptcy protection program:

• Complete or partial relief from debts and contracts, given that the business remains operational.
• Cessation of operations and sale of its assets to pay off the debts.

Types of Bankruptcy Protection: Individuals

Individuals can opt for bankruptcy protection under any of the two commonly used forms:

• Chapter 7: In Chapter 7, where the “chapter” refers to the chapter in which this bankruptcy code is described, a trustee is appointed to control the individual’s assets. He then liquidates these assets to return the loaned amount to creditors. The individual is, however, allowed to retain some of his/her personal property on the basis of the laws of his/her state. This type of bankruptcy protection is also called a “straight bankruptcy” or “liquidation.”
• Chapter 13: Also called “wage-earner bankruptcy,” this protection allows individuals to propose a plan through which they can repay their debts without paying interest. The proposed payment plan, which needs court approval, requires individuals to pay debt completely over a period of three to five years. Under Chapter 13, creditors are required by law to abide by the terms of the payment plan.

Individuals opting for either of the two bankruptcy protection plans find it difficult to obtain credit for the next ten years.

Types of Bankruptcy Protection: Business

Businesses may seek bankruptcy protection under:

• Chapter 7: This is similar to the bankruptcy process for individuals.
• Chapter 11: Under this bankruptcy protection plan, businesses are required to reorganize instead of liquidate their assets. In Chapter 11, a business proposes a repayment plan to eliminate debt liabilities within a specific time frame. The shares of this business, if any, can no longer trade on a public stock exchange. A business may take months to years to emerge clear from this kind of bankruptcy.