All across the United States the number of bankruptcies being filed in federal court continues to rise. Much of this is due to a continued sluggish economy which has been mired in recession since early 2008. Especially hard-hit is the American middle class which has seen personal bankruptcies increase at a higher rate than corporate bankruptcies. So what's the difference between a personal and corporate bankruptcy? Keep reading and we'll explain all you need to know about it.
The Principle of Bankruptcy
The idea behind both types of bankruptcies is to provide debt relief for individuals or companies whose assets are significantly insufficient to stay current on debt payments. The biggest difference between a personal filing and business filing has to do with the assets under consideration and who is ultimately responsible for debts.
For example, in a business bankruptcy only the company's assets are in question unless the business is a sole proprietorship. The business itself is liable for its debts rather than owners and officers. In this case, a business bankruptcy is the appropriate option.
With a personal bankruptcy however, things are just the opposite. All of the individual's qualifying assets are at risk in a personal filing, because he is liable for all his own debts. This is true whether or not the individual is self-employed or works for someone else.
Self-Employed or Not
The self-employed businessman whose company is structured as a sole proprietor would file for personal bankruptcy if warranted. That's because in a sole proprietorship all company assets are considered the personal property of the owner. This is why many business attorneys encourage the sole proprietors to nonetheless organize his company as a corporation. This isn't always the best option for everyone, but it does offer some protection of personal assets during a bankruptcy proceeding.
But even if you're not the owner of a small business, you may find yourself in a position where you have spent far more money than you take in. One of the biggest causes of personal bankruptcy among individuals in this situation is over extension on credit cards. Because credit cards typically charge extremely high interest rates under normal circumstances, when payments are missed and penalty rates are assessed, credit card debts spiral out of control. Before too long an individual can face complete financial collapse.
Types of Personal Bankruptcy
According to federal law there are six different types of bankruptcy filings possible. However, only two of them apply to individuals. The first is a Chapter 7 liquidation, the second is Chapter 13 reorganization. The type of filing you choose really depends on your current circumstances and income. To help you understand, we'll look at these two filings in reverse order.
Chapter 13 - Reorganization allows you to get a handle on your financial resources and establish a plan by which you can pay off your creditors. During the reorganization period your creditors will not be able to continue their collection efforts on past debts, and you will be allowed to negotiate payment terms that are more suitable to your current level of income. The reorganization is the best way to go if you have assets you want to protect because, under this chapter, they cannot be seized to pay creditors as long as you follow the plan that's been laid out.
There are two conditions that come with a Chapter 13 bankruptcy. The first is that you come up with a plan that the court deems suitable. If you present a reorganization plan that the court refuses to accept, you will either be ordered to come up with a new plan or forced to go into liquidation. The second condition is that you must have sufficient disposable income to make your plan work. By disposable income we mean income above and beyond what you will use to pay your current expenses. If you have insufficient disposable income to make a workable plan, you will be forced into Chapter 7 liquidation.
Chapter 7 - In a liquidation proceeding the court seizes all of your qualified assets, then appoints an officer to sell those assets and disperse the funds to your creditors as he sees fit. Though this is a fairly devastating way to go, you will be free from all of your dischargeable debts once the sale and dispersal have been completed.
One thing you need to understand about personal bankruptcy is that not all of your debts are freely dischargeable. Regardless of whether you file Chapter 7 or Chapter 13, there are some things you will still be responsible for paying in full. Examples of these types of debts include mortgages, auto loans, back child support and alimony, student loans, and any debts you incurred through illegal or fraudulent activity.
Probably the most important item in this list is your mortgage. During a bankruptcy proceeding you may be temporarily free from bringing your mortgage payments current. But if they are not current when the proceeding is finished, your bank may still foreclose on your house anyway. The same can be said for car loans. That's why it is vitally important in a personal bankruptcy filing that you come up with a way to keep your mortgages and auto loans current.
Finally, it's important for you to know that personal bankruptcy is not a "get out of jail free card." The court will insist that you undergo credit counseling and attempt to use a credit consolidation service before a bankruptcy petition will be accepted. If the court does accept your petition there will be long-term consequences you'll have to deal with for 7 to 10 years. Those consequences include a poor credit history, difficulty in securing future credit, higher interest rates on any credit you do secure, difficulty in finding a job or getting a promotion, and difficulty procuring student loans for your children.