The Pros and Cons of Bankruptcy

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It is tough to live without getting into debt, and even harder if you want to finance your own business to improve your life. Unfortunately, things don’t always go as planned, and action must be taken to sort out your finances as best you can.

I have spoken about the disadvantages to debt in this article, and what I said in that article is mostly right for both personal and business debts. If you have found yourself in a situation where you feel that you are unable to repay your debts in a way which would be satisfactory to your creditors, bankruptcy is one of the options that you might wish to take. It is vital that you speak to an experienced and licensed professional with regards to your financial situation – someone such as a bankruptcy attorney would be a good place to start.

Chapter 7 Bankruptcy

Chapter 7 bankruptcy involves forgiving certain debts and liquidating assets so you can pay the remaining debts. This type of bankruptcy is more commonly seen by individuals with financial issues, whereas businesses or corporations use Chapter 11 bankruptcy.

To be eligible to file for this, debtors must have prepared all their financial documents as well as complete a series of formal documents needed for chapter 7 bankruptcy. These papers are to ensure that the financial situation of the debtor is correct and accurately represented by the documents submitted to the court.

A ‘means test’ must also be passed to be able to proceed. This involved taking your submitted income so that a six-monthly figure can be worked out – a process known as annualizing (in this case for six months rather than a year). This figure is then compared to the median income of your area of residence to find out if you the means to pay down your debts.

Advantages and Disadvantages of Chapter 7

One of the main advantages is that you will be freed from the obligations on the debt, in effect giving you a fresh start. Some types of debt are not able to be discharged, so it is worth speaking to a licensed professional about this. Also, any personal property acquired after settling the bankruptcy will not fall under debt owed to creditors.

One of the main drawbacks for chapter 7 bankruptcy is that you will lose property that is not exempt, which can include things that are of significant value to yourself. Also, it will affect your credit for some time after the proceedings have ended, in fact, this can last as long as ten years.

Chapter 11 Bankruptcy

This type of bankruptcy mostly carried out by businesses who are struggling to pay off debts while continuing to operate as normal. Assets are not seized to pay off debts like in chapter 7 bankruptcy; rather your debts are restructured so that you can afford to pay them off while the business continues to operate with all assets intact. This reason is why you would oven refer to Chapter 11 bankruptcy as a ‘reorganisation’ bankruptcy.

Advantages and Disadvantages

The main advantage of chapter 11 is that you can continue to run your business while you pay off debts, giving your company a better financial future. You restructure debts so that they can be paid off in a sustainable way, which in the long run will benefit your business.

The disadvantage of this is that you may be tempted into believing that it will help lead your business to eventual success, where the reality is that the business model might not be sustainable, and chapter 11 is only ‘kicking the can down the road’.

Choosing which is the correct path for you is a personal matter based on the advice of a qualified professional (i.e. a bankruptcy lawyer rather than a traffic lawyer). This guide serves as a quick introduction so that you are not wasting time trying to find out the basics while you are under financial pressure. Whichever option is suitable for you, don’t let minor setbacks keep you down, hard work is what lies behind most people’s success.

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