Defining “Bankruptcy”

The term “bankruptcy” comes from the Italian banca rotta. Granted, everything with an Italian name sounds like either the name of an important painter or an elaborate pasta dish, but along with their other contributions to western civilization, the Italians were the original bankers (at least in the modern sense of the word).

Banca, as you probably already guessed, is the root of our modern term “bank.” The term actually means “bench” or “table.” While today those are two very different things, if you think about it, they’re really both just flat surfaces on legs. Money lenders set up their tables and did business over these “banks,” and over time… there you go.

Rotta is a term meaning “broken” (not to be confused with “rotted” – which comes from a totally different root). Literally translated, then, banca rotta means something like “broken bench,” or – in context – “broken bank.” Your personal bank is broken; you can’t pay your debts.

Pretty depressing, right?

Rotta can also be translated as “rupture,” however. Granted, in some ways, this sounds way worse. Broken is bad enough, but ruptured? Eeewwww! But this same root is the basis for modern words like “interruption” and “route.” An interruption is different than something being entirely broken. Interruptions don’t last forever. And a route? Even if a route is partly established by someone blowing away obstacles (think of the sort of demolition that sometimes has to be done to lay tracks or build highways), the goal of a route is to get you somewhere. Maybe somewhere better.

Bankruptcy can mean your bank is broken. It can mean your finances are corrupted and that life has seriously ruptured. Or it can mean a structured interruption to all of that, and a system designed to establish a route out of where you are and towards a different future.

Which one actually applies is entirely up to you.

What Is Bankruptcy?

Does it sometimes mean people who screw up are “let off the hook”? You could frame it that way. I’d prefer to describe it as allowing individuals or companies in debt to make things as right as they can, learn a few painful lessons, then get back to contributing to society as best they can.

Modern bankruptcy is still a difficult process. It’s not supposed to be pain-free. It’s a way forward, however – not punishment for “failing.” Like divorce, quitting a job, or ending a relationship, we want to do what we can to avoid it. Sometimes, however, the best way past a problem is to go through it.

Personal Bankruptcy Options

If you’re an individual considering whether or not to file bankruptcy, there are two primary bankruptcy chapters you should know. The laws which govern the various bankruptcy chapters are made at the national level. The rules, in other words, are federal. State laws can impact details, however – either adding additional protections for individuals filing bankruptcy or determining the debt or income thresholds for an individual to file or the amount of personal property protected during the process.

The most common form of personal bankruptcy is Chapter 7. Roughly two out of every three personal bankruptcies filed in the U.S. are for Chapter 7 bankruptcy. This is sometimes referred to as “straight bankruptcy” (which is a fairly accurate description) or “liquidation bankruptcy” (which is not). Let’s take a look at why.

1. Chapter 7 Personal Bankruptcy

The idea of Chapter 7 bankruptcy is that the court determines a minimal amount of personal property you’re allowed to keep and everything else you own is sold off to pay down your debts. Whatever’s left that you can’t pay is “forgiven,” or wiped clean so you can reboot and try again.

Everything Must Go (Except For This Or That Or The Other Thing)

Even if you have property not specifically exempted by either state or federal law, you may be able to hang on to it while you continue making your payments. You do this by “reaffirming the debt.” Reaffirming the debt essentially removes an item you’re still paying on from the mix and lets you super-pinky-promise you’ll continue making those payments on the original terms, despite whatever else is going on in your financial world. There’s paperwork and a few basic requirements to be met, but this provision is utilized regularly and works for many Americans.

What’s not impacted?

There are also several types of debt not impacted by Chapter 7 bankruptcy or most other bankruptcy chapters.

• If you’re paying court-ordered alimony or child support, that obligation does not change because of bankruptcy.

• Your student loans aren’t generally altered by bankruptcy proceedings.

• And it probably goes without saying that bankruptcy won’t get you off the hook for paying your taxes. The courts will try to protect your other creditors as well, if possible. Why should businesses and their owners be punished for trusting you?

That said, please remember that bankruptcy laws are not written to punish you, but to shield you from complete destitution. You want to do right by your creditors whenever possible, but the number one goal is that you’re still functioning and taking care of those you love a year later, and five years later, and twenty years later. It’s not supposed to be easy, necessarily, but it is supposed to be possible for those who need it.

Advantages To Chapter 7 Bankruptcy

When you file Chapter 7, the courts step in and begin directing the rest of the process. You may be appointed a trustee who oversees the selling of any assets and otherwise makes sure the steps are followed. (Be prepared for this to feel far more humbling than it may sound when you initiate your bankruptcy.)

On the other hand, creditors are prohibited from further efforts to collect. You should receive no more phone calls or letters, and they can’t initiate wage garnishments or take other actions against you or your assets. If you’re contacted by a creditor during the process, refer them to your attorney. Don’t negotiate or explain or apologize.

The end game of Chapter 7 bankruptcy is that whatever unsecured debts you have left are wiped clean. (Unsecured debts are those not tied to specific collateral – credit cards, most personal loans, etc.) Chapter 7 bankruptcy stays on your credit report for 10 years afterwards. That matters, and it’s worth considering if you’re weighing the pros and cons of this or any of the common bankruptcy chapters. Keep in mind, though, that being unable to pay your debts doesn’t do much for your credit, either.

The entire process takes 4 – 6 months. At that point, you move forward with a fresh start. It should go without saying that you should make it a top priority to avoid sliding back into financial arrears. People build strong credit histories and work their way into strong credit scores after bankruptcy. You can, too.

2. Chapter 13 Personal Bankruptcy

Just over a third of personal bankruptcies in the United States are Chapter 13 bankruptcies. Where the goal of Chapter 7 bankruptcy is to forgive or eliminate your existing debt, the primary goal of Chapter 13 is to assist you in restructuring your debt.

Small Business Bankruptcies

Bankruptcy law doesn’t distinguish between a small business or a big business. I’m assuming for our purposes, however, that if you’re reading this right now, you’re probably not a Fortune 500 corporation with your own legal department on levels 11 – 14 of your New York and Tokyo offices. I mean, if that’s you, we’re happy to have you. There’s good stuff here and all kinds of cool resources. It’s just that you suit-and-tie types usually don’t come slumming with us normal folks. We might be able to rustle up a few cans of soda and store-bought cookies left over from yesterday’s training, but we don’t have a sushi bar set up or anything, so…

Yeah, that’s what I thought.

Whatever the size of your business, be aware that far bigger companies than yours have gone through bankruptcy. Size is no guarantee of solvency. Sometimes, it makes it much harder to adapt and remain profitable when times change. For the moment, however, we’re going to assume we’re talking about sole proprietorships or relatively small, family-run operations. Most of the general rules are the same – it’s just the scale that’s different.

Other Types of Bankruptcies

We won’t spend much time on the remaining bankruptcy chapters. They’re rather specialized and so unusual as to almost always require specialized representation:

• Chapter 12 bankruptcy is primarily for family farms and some fishing operations. It’s similar to Chapter 13 in terms of focusing on the reorganization of debt and repayment over 3 – 5 years, but because of the seasonal nature of the businesses involved, payments are structured more creatively.

• Chapter 15 is designed for individuals dealing with debt and/or assets in more than one country. Rather than juggle completely different processes while untangling who has a claim on what, Chapter 15 streamlines the process a bit while taking every claim into account.

• Chapter 9 is for city or local governments which find themselves insolvent and unable to navigate their way clear. While rare, they allow municipalities to restructure and work out compromises much like Chapter 13 does for individuals or Chapter 11 does for businesses.

What If I’m Considering Filing Bankruptcy?

If you’re confronting severe debt and considering bankruptcy, consider a few things before you make your final decision.

• First, is debt consolidation or some other, less extreme form of reworking your finances an option? If so, we might be able to help with that. You may not have to file bankruptcy in order to find your way through your current circumstances.

• Second, should you hire a bankruptcy attorney? Bankruptcies can be a messy business, and depending on your situation, it might be worth getting professional guidance. My colleague Kevin has written an excellent piece on this exact topic which can help you consider the pros and cons for yourself.

• Third, can you do it yourself online? Technically, yes – you can file bankruptcy online and manage the process yourself. Generally, however, you only want to take this approach if (a) you’re very comfortable with legal stuff and math and paperwork, and (b) your situation is straightforward and unlikely to take any tricky turns. That first part is largely subjective, and the second almost impossible to predict. So… your call.

Conclusion

Don’t wait until you have no other options. Take a few slow, deep breaths, and focus on the present and the future. Learn from any mistakes you may have made in the past, but don’t get stuck there. It’s called the past because it’s passed.

Educate yourself, then make the best call you can, and don’t look back. If that’s bankruptcy, we’ll be here when you’re ready to start rebuilding your credit and looking for financial advice moving forward.

If you’d rather discuss consolidation options or finding other ways to take more effective control of your personal or small business finances, we’re pretty good at that stuff as well. We can help you by connecting you to a suitable lender in no time. You just need to fill out some basic information in the form below:

Let us know if we can help.