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Bankruptcy Basics: The Fundamentals of Bankruptcy Filing

Bankruptcy can be filed by either an individual or a business entity. The bankruptcy filing can either absolve the debtor of the majority of their financial obligations or allow them a limited amount of time to structure a payment plan. Bankruptcy may be an appropriate option for those faced with debt that they have no feasible way of repaying. 

A filing of bankruptcy involves both the debtor and the creditor in the process. Often times there are several different creditors involved in a single bankruptcy case. There are different types of debt which can be taken into consideration. These types include secured debt and unsecured debt. Secured debt is the only type which cannot be fully eradicated. It usually relates to possession of an item such as a car or a home. In this instance the debtor will either be required to make the necessary payments or forfeit the possession. Unsecured debt is more likely to be erased from record as it usually involves unpaid bills and other similar debts. 

There are four different chapters of bankruptcy that can be filed and these are established under the United States Bankruptcy Code. The type of bankruptcy that will be filed is dependent on whether the filing is for an individual or a corporation. The four types include Chapter 7, Chapter 11, Chapter 12 and Chapter 13. In general Chapter 7 bankruptcy is often filed by individuals although corporations and partnerships can also file this Chapter as well. In the case of a Chapter 7 filing, all assets are liquidated in order to repay the creditor as much as possible. In general, businesses try to avoid filing a Chapter 7 bankruptcy as it is often impossible to continue business when the assets have been sold. For this reason, businesses tend to turn to a Chapter 11 filing. This filing allows the business entity to continue its operations while organizing a repayment plan to pay off debts. This filing is often the most complex as there are several factors involved. In addition, there is a 120 day time limit for the debtor to come up with a plan, after that time if no plan is available, the creditors are allowed to create their own restructuring plan.

A Chapter 12 filing is for farmers who have become overwhelmed by their bills and have fallen into severe debt. Under this chapter, they are allowed to retain control of their assets while working to put together a repayment plan. A Chapter 13 filing is similar in structure to Chapter 11 and 12 however it is usually filed by an individual. In the case of a Chapter 12 filing, the individual has between three to five years to repay their debts. They also retain ownership of their properties and assets. There specific limits to the amount of debt that can be included and usually some portion of the debt ends up being discharged.

Bankruptcy can be a complicated motion to file in court and should never be entered into lightly. In light of recent abuses of bankruptcy filings, there has been put into place The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005. This act has added new provisions which make the debtor accept more of the responsibilities of their debt. In addition the act allows imposes a time limit for reorganizing and restructuring payment plans where previously there was no time limit. Any business or individual considering a bankruptcy filing should consult with an experienced lawyer before making the decision to file. 

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