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Bankruptcy or insolvency constitutes a legal term and refers to being unable to repay debts. A business and a person can declare bankruptcy.
When a person or company claims bankruptcy, it is described as a voluntary bankruptcy, and when your debtors force you into bankruptcy, it is referred to as involuntary.
A voluntary bankruptcy occurs when the debtor or borrower, the party that owes the money files with the courts.
Involuntary bankruptcy happens when your credits file a petition with the courts. Bankruptcy can only occur with a court filing.
Since bankruptcy is a legal state, once the petition is filed with the appropriate court, local and state laws vary greatly.
Different Kinds of Bankruptcy
In the US, these legalities are referred to as Chapters 7 and 11, 12, and 13. Chapter 7 is a liquidation procedure, where all assets are sold, and the court oversees the distribution of the money to creditors based on their standing.
Both businesses and individuals can file for chapter 7. Chapter 11 is a reorganization process where businesses are allowed to freeze their debts and continue to operate.
In contrast, a method and procedure are negotiated through the courts to satisfy the obligations of the company.
Chapter 13 is called a wage earner plan and helps people attempt to restructure their debts to repay their debts.
This can include some debt forgiveness by creditors or reduced interest rates or balances.
Not all private persons are eligible for Chapter 13, high amounts of debt don't qualify, and the person must file Chapter 11 or 7.
Most individuals choose Chapter 13 over Chapter 11 or Chapter 7 because it aids them in avoiding foreclosure on their residence.
The filing of bankruptcy is considered a last resort when businesses and persons have not been able to negotiate terms directly with their creditors.