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how bankruptcies work

Have You Ever Wondered Who Pays for Bankruptcies?

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If you are a debtor who is out of options and is now thinking of going bankrupt, it might be the right way to go for you. However, if you are an investor, a personal creditor, either secured or unsecured, the situation for you will be very different if one of your debtors goes bankrupt. This is why it is significant to understand how bankruptcies work no matter which boat you are in.

When you start understanding the legal procedures, the first thing that may come to your mind would be as to who really pays for bankruptcies? This question is completely valid. However, the answer is much trickier and complex than you might think. The rationale behind it is that bankruptcy is not a simple process with just one situation that can occur. There are different processes, involving different kinds of bankruptcies, which eventually results in different solutions to cover the costs of different loans that you have.

The basic difference in payment methods results from two different types of bankruptcies, i.e. chapter 7 and 13 bankruptcies. Chapter 7 is applicable when it can be proved that you cannot pay any of your loan at all and so all your assets are taken away to pay back your debts. This type is also called straight bankruptcy, although, there are still several complications in this as well.

Chapter 13, which is also referred to as reorganization, is a plan where the court revisits your payment plan and make changes according to your monthly income. This way, you get at least 3-5 years to pay off some part of your debt and see if there still exists a need of going completely bankrupt. One thing that you need to keep in mind is that both of these are still types of bankruptcies and so if you opt for them, you will have it on your credit for 10 years!

What if All Your Assets are not Enough to Pay Off Your Debts?

This is often the case when big companies go bankrupt. This is why corporate bankruptcy is the most harmful one. However, there is a process through which the court divides the amount recovered. This is done under section 507 of the code which states the hierarchy through which the amount is divided and who is given priority. The priority is always given to secured creditors, after which unsecured creditors are in line, which may include employees and lastly if there is still some recovered amount left, stockholders are entertained. Although, reaching that stage is a rare thing and so unless everyone else is covered, stockholders get nothing!

Even apart from companies, when we are talking about personal bankruptcy when the cost cannot be completely recovered and the money is not paid completely to the creditors, they have to find different, more indirect ways of retrieving that amount. Some personal investors increase their interest rates, while sellers have to increase the profit amount so that they can cover at least some of their losses!

Whether you are a debtor or a creditor, it is always necessary to get legal advice beforehand, to understand these critical processes in an easier way!

For more information, speak with an experienced bankruptcy attorney – schedule your free 1-hour consultation today: https://seanflynnlaw.com/calendar/

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