When a person or company is unable to make payments to creditors to pay their debts, they can file for bankruptcy protection under the United States bankruptcy law. By an individual, bankruptcy protection can involve either a cancellation of most debts, along with the divestment of some of their assets, or a structured plan to pay off the debts owed.
For a company, bankruptcy protection can either provide full or partial debt relief and contracts under the condition that the company will remain in operation, or the company may cease operations and sell its assets to pay off debts.
There are two types of bankruptcy protection commonly used by individuals
chapter seven, and chapter 13, where the “chapter” refers to the chapter of bankruptcy code that describes each one. In chapter seven, also called a “straight bankruptcy” or “settlement”, an administrator is appointed to control each asset. The administrator then liquidates or sells assets, and then gives money to creditors to pay off debt, as far as possible. But the individual is allowed to retain some personal property, depending on the laws of the country in which they live.
Chapter 13, also called “Employee Bankruptcy”, allows the individual to propose a plan to repay their debt interest-free over a three to five year period, although the individual’s payment plan is subject to court approval. While in Chapter 13, an individual protected from creditors is collecting on debt or seizing assets, paying debt, and creditors are required to comply with the terms of the approved payment plan. Both types of personal bankruptcy make it very difficult for the individual to obtain credit for a period of seven to ten years after seeking bankruptcy protection.
Companies seek bankruptcy
Companies may also seek bankruptcy protection under Chapter 7, but also under Chapter 11, which consists of a reorganization, rather than a liquidation of assets. It can take anything from months or years for a company to come from this type of bankruptcy.
As in Chapter 13, a company in Chapter 11 may propose a repayment plan for its debt within a certain timeframe, after which it is up to the creditors to come up with a plan. If the company does not have stock traded on a public exchange, then the stock is no longer allowed to be traded publicly when bankruptcy protection is pursued. In some cases, this causes the value of the company stock to go to zero.
For companies, and especially for individuals considering bankruptcy, it is highly advisable to keep the advice of a bankruptcy lawyer, due to the complexity of bankruptcy law, which also varies slightly from state to state.