Bankruptcy can happen to anyone and it can happen in a short amount of time. Sure, no one wants to face the financial disaster that bankruptcy often means but it is often impossible for some businesses to avoid it. Seeing that one out of every three small businesses go into bankruptcy it is easy to see how it could happen to you. In fact some of the most popular owners of large corporations such as Walt Disney, Milton Hershey and Henry Ford have faced bankruptcy. All three men faced the financial difficulties that made their businesses start off as a failure before they overcame them to have corporations that are known worldwide. We are all aware of Disney World, Hershey Candy and Ford cars. Bankruptcy builds character and endurance.

To be able to avoid bankruptcy you first need to understand it. There is no way you will be able to know what you are dealing with until you actually research it and see its consequences. In October of 2005 the new Bankruptcy Abuse Prevention and Consumer Protection Act took action and bankruptcy was turned on its head. It does not matter whether you are an individual or a small business owner; you should know what you are dealing with when it comes to this new law and how it could affect you.

Bankruptcy - what’s that?!

So what exactly is bankruptcy? We all know that it is the definition of financial difficulties and disaster and something that we should all strive to avoid. The most popular form of bankruptcy for individuals in the past has been Chapter 7. In Chapter 7 bankruptcies most of your assets are sold in order to repay your debts. Nearly everything you own that is of worth is going to be resold in order to pay off your bills and credit card statements. Often, the only thing you will be left with is your home and your vehicle, for obvious reasons. Many times though you will have your unsecured debts written off under Chapter 7 bankruptcy and you won’t be required to pay them.

Chapter 13 in another popular form of bankruptcy for individuals and it consists largely of repayment plans. If you file a claim under Chapter 13 you will most likely be stuck paying off all of your debts in full but you will be working with your creditors and the courts to decide on a repayment plan until all of your debt is gone. Chapter 11 bankruptcies are much the same but are dedicated almost entirely for small businesses that have fallen into bankruptcy. Under Chapter 11 bankruptcy you are still required to pay back your debts and you will just undergo a reorganization period to get you back on track.

Ever since the new law (Bankruptcy Abuse Prevention and Consumer Protection Act) it is harder then ever for individuals and/ or businesses to claim Chapter 7 bankruptcy. Instead of being able to claim under Chapter 7 the courts are now requiring that people file Chapter 13 so they can pay their debts in full. No longer will people or small businesses be able to get away with filing for bankruptcy as a way to get out of a tight financial spot; they will now be required to find new ways to pay back their debtors- no matter how long it takes!

There’s good in everything – even in bankruptcy

There is some good news in this for the small businesses though. Small businesses will find it easier then ever to collect what is owed to those who file for bankruptcy. In the past if they were owed money from someone who claimed Chapter 7 bankruptcy the chances of them seeing their money was slim to none. But now under the new law, it is much easier for them to get the money that they deserve. The new law states that you are required to pay back an unsecured creditor (loan, credit card, ECT) for goods or services that are given twenty days ore more before a bankruptcy is filed. Because of this more small business owners will get the money that they are owed by card holders.

Bad News for Those Filing Bankruptcy

There is bad news that accompanies all good news and in the case of the new bankruptcy law, the bad news is for both the debtor and the small businesses out there. First let’s start with the debtor. Obviously the debtor is seeing this new law as bad news because they are now forced into claiming Chapter 13 bankruptcy and will no longer get their debts written off. Bankruptcy is no longer just an easy way out of a difficult situation. Now bankruptcy means reorganizing debts in a more payable way.

For small businesses, the new law means bad news because it will be tougher for a new small business to stay in business. Once a small business files for bankruptcy one time it will be much harder then ever to get another small business loan or business credit card. Applying for credit cards is now more difficult for a business owner. Since these new laws are sure to hurt small businesses and discourage them from starting up in the first place it is sure to hurt the US economy because small businesses are a large part of it. These businesses make up a good portion of this sector.

This is how it works: If you are a debtor or small business owner with less then two million dollars in debt then you will most likely be appointed with a trustee who will review all of your financial records. If they think you have a good shot of continuing your business they will do everything they can to keep you afloat and have you file under Chapter 11 or 13. If they think your business is going down they may decide that you should file under Chapter 7-which means all of your debts will be wiped out.

If you are a small business owner you may run into trouble if you don’t have your business set up as an LLC (Limited Liability Company). An LLC means your business is completely set apart from your personal assets so if your business goes down, your personal life won’t follow it. Many business owners don’t realize this however and have their personal assets connected with their business ones. In this case, you can have your personal credit hurt from your business decisions!

Bankruptcy law before and after 2005

The law taking place in October 2005 differs from the older laws regarding bankruptcies in a variety of ways. Here are the main ways they differ:

• You absolutely have to seek out advice from a credit counseling agency at least six months before filing for bankruptcy! This law means that you can’t just use bankruptcy as a first option. You have to go through the steps of thinking out your options before just claiming bankruptcy. You should have a well thought out idea and you should have the backing of an agency.
• You will be required to take a ‘means’ test under the new laws! A ‘means’ test is pretty much a test that figures out what your capabilities are of paying back a debt. If the court feels like you have the ability to pay back a debt whether through savings or capital then you won’t get your debts wiped out- you’ll have to pay them!
• Attorneys are now liable for any inaccurate information in a claim! In the past if you lied under oath or wrote inaccurate information on your claim then you would be the only one liable for your actions. Now your attorney is liable for your actions as well! This new part of the law ensures that more of the bankruptcy claims will be accurate and true because the attorneys are going to make sure of it!

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