Bankruptcy Basics: The Difference Between Liquidation & Reorganization

There are many reasons why people have to declare bankruptcy ranging from over extended credit, loss of income, medical debt, and many others. Deciding to declare bankruptcy is never an easy decision, but if you are going to go through the process, you will want to make sure to choose the right type of bankruptcy.

For most people, the two options include chapter 7 (liquidation) and chapter 13 (reorganization). Each of these options are good for different situations, so taking the time to learn about them both can help you to choose which is right for you.

Liquidation of Assets

When you choose to liquidate your assets, the majority of what you own will be sold off in order to generate a lump sum of money to help repay your creditors. The judge in your case may allow you to keep certain debts for assets such as a home or vehicle, if it is determined that you will be able to make your normal payments on those items. In addition, certain types of debt are usually not dischargeable in bankruptcy, such as student loans and spousal support.

Everything else with significant value, however, will normally need to be sold. The court will decide which creditors get what amount of the money that is generated from the liquidation of any assets you have. All the remaining debt will be discharged, meaning you no longer have to pay the balance.

Reorganization of Debt

This type of bankruptcy allows you to reorganize the debt to make it more manageable. The courts will work with you and your creditors to determine a solution that works for everyone. In this type of bankruptcy, you may be able to reduce interest rates, eliminate late penalties, extend loans out over extended periods of time, or even delay payments until money begins coming in.

While this type of bankruptcy does not eliminate the debt itself (in most cases), it results in a repayment plan that will make it much more manageable. This is a preferred option for people who are behind on payments due to a temporary situation, but should be able to keep up with them going forward.

Choosing Which Type of Bankruptcy is Right for You

In most cases the courts will allow you to choose which type of bankruptcy is best for your situation, as long as it is realistic. There are some instances, however, when the creditors can demand that you liquidate your assets. When deciding which one is right for you, it can be very helpful to have your situation reviewed by a bankruptcy attorney from the Law Office of Ray Garcia who can let you know what the likely results of each option will be. We may also be able to help you retain certain assets if that is the outcome you are hoping for. If you are struggling financially, and you believe bankruptcy could be right for you, please give us a call today to discuss your options.