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When a company applies for bankruptcy, creditors' attempts to collect debts immediately cease; these efforts can only resume once the bankruptcy court has resolved all outstanding issues. Depending on the circumstances, applying for bankruptcy has both advantages and disadvantages. This essay discusses the benefits and drawbacks of declaring bankruptcy so that people and companies can determine whether it is the best course of action for them.
By declaring bankruptcy, you can quickly get rid of your debt. (Jagtiani & Wenli, 2014). After a debtor files for bankruptcy and the court gives a discharge order, the debt discharge typically takes place in less than three months. Upon the allocation of a debtor’s assets to unsecured creditors by the
trustee, the court marks the court as closed. The primary objective, in Chapter 7 bankruptcy is to acquire a discharge of the total unsecured debts (Elias et al, 2013 p 21). This action helps to end creditor intimidation and financial stress about the situation.
Filing for bankruptcy can assist in the elimination or modification of secured debt (Jagtiani & Wenli, 2014). In some cases, judgment liens in opposition to an individual’s home can be abolished during bankruptcy. In Chapter 13 bankruptcy, settlement of secured debt can be adjusted and time extended to be reimbursed without the occurrence of any default, such as losing an automobile or a home.
Filing bankruptcy helps to safeguard assets (Jagtiani & Wenli, 2014). In the event of a creditor suing a debtor and a judgment is obtained, execution of the court’s decision follows during which creditors can compel the sale of individual assets and garnish bank accounts. During the filing for bankruptcy, it will instantly stop and safeguard the debtor’s property. With time, however, the overall amount of assets that one can protect is determined by the exemptions permitted under the code of bankruptcy.
The final benefit of filing for bankruptcy is that it allows an automatic stay (Jagtiani & Wenli, 2014). . After filing for bankruptcy, automatic stay compels an instant termination to actions of creditors including lawsuits, utility shut-offs, foreclosures, sheriff sales, garnishments, repossessions and in most casa evictions.
Drawbacks of Bankruptcy Filing
One of the drawbacks of filing for bankruptcy is that it leads to loss of property while processing bankruptcy claims. One obvious result of Chapter 7 bankruptcy is the forfeiture of all un-exempt assets owned (Elias et al, 2013 p 32). In a majority of cases in Chapter 7, all property is exempt; nonetheless, for cases where the property is not exempt, a better filing alternative may be Chapter 13 because un-exempt assets are not exposed to likely judicial disposal by a Bankruptcy Trustee.
Another disadvantage of filing for bankruptcy is that the record will remain on one’s credit report for at least ten years (Jagtiani & Wenli, 2014). However, in bankruptcy, obligations to settle debts are erased when debt discharges are issued in the process of liquidation. Hence the debtor stops being lawfully responsible for debts, thereby assisting the debtor’s capacity to preserve a reasonable extent of the history of credit payment during the period of the following ten years.
In spite of the disadvantages, filing for bankruptcy is encouraged as it enables businesses and individuals that have difficulty paying debts to sort their financial challenges and begin reconstructing their credit. Federal regulations control the right to file for protection during bankruptcy (Elias et al, 2013 p 9). Hence all bankruptcy cases are the jurisdiction of federal courts. Nonetheless, it is up to the state law to decide what to protect in bankruptcy.
Elias, Stephen et al. How to File For Chapter 7 Bankruptcy. Berkeley, Calif., Nolo, 2013.
Jagtiani, Julapa, and Wenli Li. "Credit Access after Consumer Bankruptcy Filing: New Evidence." SSRN Electronic Journal, 2014, Elsevier BV, Retrieved from doi:10.2139/ssrn.2494402.
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