What Does Filing for Bankruptcy Mean?

Most of us have played Monopoly at some point. If you have, you know the stinging feeling of bankruptcy — at least in the game, bankruptcy is death. Once you become insolvent and cannot cover your rent after landing on some gentrified hotel on Connecticut Avenue, you lose — the game is over.

Life is not Monopoly. In real life, bankruptcy is an opportunity to reset your financial life. For consumers, bankruptcy might mean selling off excess assets and discharging any debt not covered by the proceeds of those sales or it could mean keeping everything but working out a repayment plan. For businesses, bankruptcy could mean closing the doors, selling off your assets, and paying off as much of your debt as possible or it could mean a reorganization of your company with a plan to restructure assets and debts and continuing to earn income. 

While bankruptcy is not a trivial matter, it is not financial death or anything to be ashamed of. Former presidents, celebrities, and massive corporations have all filed bankruptcy and emerged on the other end with a healthier financial picture.

 What Does Filing for Bankruptcy Mean for Individuals?

Most individuals will file bankruptcy under Chapter 7 or Chapter 13. Under Chapter 7, a bankruptcy filing requires you to relinquish any nonexempt assets (extra cars, extra property, essentially anything that is not a necessity). Those assets will be sold and the proceeds will be used to pay off as much of your debt as possible — with the remaining debt written off, other than a few exceptions such as alimony or tax debt.

With a Chapter 13 filing, an individual gets to keep those assets. However, debt is restructured into a payment plan that can take a few years. The purpose of this is to allow the debtor to get back into good standing with all of her creditors while not relinquishing any of her assets. Some debt will be eliminated in the process, such as some secondary liens on property, but for the most part, Chapter 13 is about finding a reasonable way to repay rather than eliminate.

What Does Filing for Bankruptcy Mean for Businesses?

For your everyday mom and pop shop, a financial downturn can devastate that business’s cash flow. For example, many people expected the pandemic shutdowns of 2022 to force many businesses into bankruptcies since they weren’t allowed to open up or do business, though statistics surprisingly showed an opposite trend, perhaps due to the large number of relief programs.

Which path a business takes with bankruptcy depends on whether the business wants to (or realistically can) continue operating. A business can choose the Chapter 7 route, just like an individual, which would mean liquidating all of the business assets and paying off creditors. The business shuts its doors. Of course, the people who own the business are free to start a new business, but effectively this means the end.

On the other hand, for a business that wants to continue operating, they can file for a Chapter 11 bankruptcy. Chapter 11 is the creation of a plan to repay all or part of what is owed. Once the bankruptcy petition is filed, there is a stay on all debt collection efforts which makes it easier to get organized and to negotiate a repayment plan with all of one’s creditors. This repayment and reorganization plan requires a lot of back and forth with creditors, negotiation over amounts to be repaid, and even questioning under oath of the business owner by the creditors. However, on the other side of that very stressful process is a business with a repayment plan, some discharged debt, and an increased likelihood of the business being able to escape bad leases or contracts. Plus, banks are more likely to lend to a business that is working under a Chapter 11 plan than one that is simply financially distressed with no plan at all.

Bankruptcy is Really About Making a New Financial Plan for the Future

Bankruptcy isn’t magic. It won’t take a caterpillar, stick it into a cocoon and have it emerge as a beautiful butterfly. And it certainly isn’t painless, especially if you’re a small business being grilled by creditors.

However, for individuals and small businesses that are being swamped with collection calls and letters. And for those who have reached a point where there is no reasonable way to carry on their financial life or their business while encumbered with these debts and harassing debt collectors, bankruptcy is about making a plan to move forward. This can mean moving forward by shutting down a business, or it can mean moving forward by reorganizing individual or corporate debt, shedding some dead weight, and emerging with a much stronger financial picture, ready to thrive in one’s post-bankruptcy life.

If you are an individual or a small business owner that is in need of assistance with debt collectors and overwhelming financial stress, discussing your options with regard to bankruptcy with a licensed attorney is an excellent first step in making a plan to get your financial life back on track. Get started today with one of our network’s trusted bankruptcy professionals.