There are two types of personal bankruptcy, chapter 7 and chapter 13. In both types a debtor can file alone or jointly with a spouse. Bankruptcy pays creditors back a portion of the debt they are owed by the debtor.
Chapter 7 Bankruptcy
In a Chapter 7 personal bankruptcy, the debtor pays for the bankruptcy itself by filing a bankruptcy petition fee (different in every jurisdiction, but usually around $200 to $300) and then by selling off estate assets in order to pay creditors.
Chapter 13 Bankruptcy
In a chapter 13 bankruptcy, the debtor or joint debtors again pay a bankruptcy petition filing fee when the bankruptcy is filed. The debtors then agree on a repayment plan with the bankruptcy court where a sum is paid to a bankruptcy trustee who then pays the creditors in the bankruptcy plan.
How Creditors are Paid through Bankruptcy
In order to be paid, a creditor must file a proof of claim with the bankruptcy court. This claim includes any documentation to prove how much money a creditor believes they are owed, usually bills or account statements. If the claim is approved by the bankruptcy court, the claim will be paid through the bankruptcy plan.
Chapter 11 Corporate Reorganization Bankruptcy
A chapter 11 bankruptcy is usually filed to reorganize a corporation to make it more effective and pay off creditors slowly over time without shutting down the business. While the reorganization is taking place, a "creditor's committee" is set up made up of the seven largest creditors to the corporation. This committee oversees the reorganization and protects the creditor's interests.
Societal Costs of Personal Bankruptcy
Who really pays for personal bankruptcy filings in the long run? Personal bankruptcy itself pays back creditors usually pennies on the dollar: when the bankruptcy is over, the debt is entirely discharged even though the company has only received a small percentage of the actual amount owed. The company has to absorb those losses, which usually raises operating costs short term and overall costs to consumers in the long term.
Societal Costs of Corporate Bankruptcy
Corporate bankruptcy reorganization often results in a loss of jobs in the company to make the company more effective. If the company has long been cutting prices in order to bring in more sales for the company, the bankruptcy can have further effects on other companies in the same market but forcing them to slash their prices just to remain competitive. Often after this price gouging war is over, consumers are reluctant to purchase goods at regular prices again, further hurting the other companies' profit margins. The societal costs of corporate bankruptcy last much longer than personal bankruptcy and consumers usually end up paying for corporate bankruptcy in loss of jobs and higher prices of goods.
Read More: Stages of Bankruptcy
- Comstock/Comstock/Getty Images