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What does it mean to File for Bankruptcy?

Bankruptcy is the legal process that one will go through when a bankruptcy court determines that you need help or relief from your debts. Not just anyone can file for bankruptcy as you must meet certain requirements in order to be eligible to do so. If there is a silver lining for filing for bankruptcy is that you could be relieved of your financial burden to repay loans and outstanding debts, but this negative mark will be notated and remain on your credit report for 7-10 years.

So it’s not all horrible news, right?! Being informed is the best way to decide this magnitude, so let’s dive right into the good stuff.

In this blog, we will unpack what Bankruptcy is and all it entails.

Bankruptcy Chapters and Who can File?

Both individuals and businesses as a whole can file for bankruptcy. There are a few different types of chapters, as they are called, that you can file for depending on your unique circumstances. The most common ones are Chapter 7, 13, 11, and 12 bankruptcy, but there are a few lesser-known ones we will mention as well.

Chapter 7

Chapter 7 bankruptcy can be filed for individuals, businesses, corporations, and partnerships. This chapter is known as Liquidation Under the Bankruptcy Code and is the most common chapter to file. In Chapter 7, Bankruptcy, a trustee is appointed and will manage all the assets to pay creditors or the businesses and people owed. This process can take anywhere from 90 days to 120 days to complete fully.

One of the main requirements to be eligible to file is that you must have filed the four previous tax returns. Once that is complete, you can generally expect one of two different outcomes. The first being your case may be dismissed. Unfortunately, it sounds like a good thing, but the IRS says that they will be keeping your payments you have made and extending the amount of time they give you to repay your debts.

The second outcome is what is called a discharge. This is when the IRS will completely get rid of any personal tax debts that are older than three years as long as you have not filed any late tax returns, but you will still be required to pay back your most recent debts.
Something interesting to note is that this outcome cannot be applied to businesses because the business will go through liquidation.

Chapter 13

Chapter 13 Bankruptcy is called Voluntary Reorganization of Debts for Individuals, and yes, as you may have guessed, this is only for individuals or those who are sole proprietors. The process to file for Chapter 13 can take anywhere from 3 to 5 years, depending on if there are any hardships in a given case.

As with Chapter 7 Bankruptcy, you must also have filed the four previous tax returns to be eligible. This type of bankruptcy also involves having a trustee, but their main focus is the adjustment of debts. They will be focused on distributing payments from the debtor to the creditors or the entities who are owed money. The same outcomes can be expected when filing Chapter 7 Bankruptcy

Chapter 11

Chapter 11 Bankruptcy can be filed by those who are considered individuals, corporations, limited liability, and partnerships. This chapter is also known as reorganization. If your debts exceed the allowable limits for Chapter 13, you can also file for Chapter 11 at the same time.

The critical thing to note is that you must have an approved financial repayment plan in place to file under Chapter 11. In a reorganization, a debtor can pay the creditors a reduced amount to remain in business. Still, there is also the option for liquidation for the filer as well.

The process can be a lengthy one and can take up to five years to fully complete. The resulting outcomes are the same as the other previous chapter filings, either resulting in a dismissal or discharge of debts, as long as you meet the requirements.
Business Men Frustrated wiith Bankruptcy

Lesser-known Bankruptcy Filings

Capital expenses are those expenses that you incurred while starting your business. In general, there are three types of capital expenses: business startup costs, improvements, and business assets. You do, however, have the option to deduct or amortize certain startup costs for this section. Keeping track of all your records will really come in handy when looking to claim this expense.

Accolade Accounting

Accolade Accounting is here to guide you through.

While there are different options for filing for bankruptcy, you want to make sure you are seeking qualified counsel on the matter. Filing bankruptcy has negative implications, so it is best to be fully knowledgeable before making any moves. It will be a permanent mark on your credit report and impact your report and score for up to ten years. It is not a decision to take lightly and could affect future purchases or requests for credit.

At Accolade Accounting, we are experts in working with the IRS to help you file for bankruptcy or find alternative solutions. When you need a team and support system that you can trust, reach out to Accolade Accounting. With IRS experience, we know how to navigate through the process and will gladly help. Contact us today to get started and get you back on track.

 

 

 

Until next time my friends,

Cheers!

JD Longino, CPA

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