When you hear the term “bankruptcy” what do you think of? Most people picture a family being forced out of their home with a BANKRUPTCY sticker on the door, advertising to the whole world you have lost your assets. Or they picture an empty mom-and-pop establishment with no customers and “mom” crying her eyes out at the thought of losing their business and possibly their home. But most people have a flawed understanding of what bankruptcy really is. Bankruptcy, although not preferred, can be a useful tool in restructuring your finances and helping to eliminate your debt.
What is Bankruptcy?
According to Wikipedia – Bankruptcy is a legal status of a person or other entity that cannot repay the debts it owes to creditors. In most jurisdictions, bankruptcy is imposed by a court order, often initiated by the debtor.
Bankruptcy is not the only legal status that an insolvent person or other entity may have, and the term bankruptcy is therefore not a synonym for insolvency. In some countries, including the United Kingdom, bankruptcy is limited to individuals, and other forms of insolvency proceedings (such as liquidation and administration) are applied to companies. In the United States, bankruptcy is applied more broadly to formal insolvency proceedings.
What Types of Bankruptcies Are There?
There are four types of bankruptcies, each named for their respective chapter in the United States Bankruptcy Code. The type of bankruptcy you file depends on numerous factors, including whether you are an individual or a business. The four types of bankruptcies are:
Chapter 7, Chapter 11, Chapter 12, Chapter 13.
Chapter 12 Bankruptcy is the most recent addition to the bankruptcy laws. It specifically allows “family farmers” and “family fishermen” to avoid liquidating all of their assets, or avoid foreclosure by restructuring their finances.
Chapter 12 is the least common of the bankruptcy filings. That is because it only pertains to a small portion of the population. Of more than 1 million cases in 2011 less than 650 were Chapter 12 filings.
Are You Eligible For Chapter 12?
If you are a family farmer or fisherman with regular annual income you are eligible to seek protection under a Chapter 12 bankruptcy.
How Does Chapter 12 Work?
A Chapter 12 case is initiated when the debtor files voluntarily a petition of relief. A bankruptcy trustee is then assigned to the case. Their role is to make sure documents are in order and to oversee the operations of the debtor. The debtor must propose a plan to repay with in 90 days of filing the bankruptcy.
Similar to a Chapter 13 repayment plan, the debtor proposes to pay creditors over three to five years, with three years being the minimum plan period, unless the debtor manages to pay off their debt sooner. The plan period needs court approval in order to be extended to five years.
No one ever wants to be in a situation to file for bankruptcy, but if you must, there are ways to go about it smoothly.