Know when to declare bankruptcy

Life doesn't always go as planned. You may have had to take on debts that exceeded your ability to repay them each month. You are now wondering how to put your financial situation in order.

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Knowing when to declare bankruptcy is a valuable skill for individuals and small business owners. Learn more about it and determine if this is the best decision for your financial needs.

What is Bankruptcy?

Bankruptcy is a legal procedure initiated by people who have too much debt. They must sign a federal petition considering their outstanding financial obligations or debts before asking their creditors to work with them to settle their debt with the remaining assets.

What are the types of bankruptcy?

People can accumulate too much debt as individual consumers or business owners, so there are many types of bankruptcy to deal with these situations. These are the specific chapters outlined in the US Bankruptcy Code that you can consider if you find yourself unable to repay your debts.

Chapter 7: Individual Liquidation

Most people who need to declare bankruptcy due to personal debt will file for Chapter 7. A federal court appoints a trustee to help the individual sell assets to pay off lenders or the creditors. You can claim specific assets that are exempt from Chapter 7 bankruptcy, such as your car, pension, or household equity.

Chapter 11: Reorganization Bankruptcy

Small business owners can file for Chapter 11 bankruptcy to reorganize their assets, affairs, and debts. If the collection of these factors exceeds $5 million, a reviewer will step in to guide you through the process.

This step can be helpful for business owners, as it allows the business to stay open and operational during restructuring. Creditors can also propose Chapter 11 bankruptcy if the debtor does not propose the idea first.

Chapter 13: Asset Maintenance and Repayment Plan

People who file for Chapter 13 bankruptcy can keep their assets but must pay off their debts within three to five years of their plan being approved by a court. You won't have to liquidate anything if you don't miss or skip any payments. Most people who do not receive this bankruptcy approval are workers without reliable sources of income.

When to declare bankruptcy as an individual

Before declaring bankruptcy, it is essential to negotiate with your debtors or creditors. They will still be able to get their money back if there is a way for you to make long-term payments and possibly pay off your debt more efficiently.

Sometimes debtors will negotiate for this reason. However, they may not if they don't see a viable path due to your history or financial situation.

When negotiation is not possible and you are on the verge of losing your home or other essential assets because you cannot make monthly payments, it may be time to file for bankruptcy. First, schedule a credit counseling session to obtain the correct certificate for the type of bankruptcy you have applied for.

An advisor will review your assets and liabilities during this session and find the best solution for your needs, even if it is not bankruptcy. You can find these experts by contacting federal credit counseling agencies.

You might be worried that your existing property or equity isn't enough to pay off your debts. If so, your most senior lending institution will establish a financial solvency plan to address the remaining debt owed alongside your credit counselor. By working on the necessary modifications, your minority lenders will follow the most important decisions if they create the plan in good faith.

When to declare bankruptcy as a business

When debtors fail to negotiate with small business owners regarding their loans, it may be time to file for bankruptcy. Typically, this would mean a Chapter 11 case, which has a few pros and cons for people running small businesses.

You can benefit from this type of bankruptcy if...