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Russell G. Small and Kenneth Lenz

What is the difference between bankruptcy and reorganization?

| Mar 4, 2021 | Bankruptcy

The financial world has plenty of its own jargon, as does the legal world. It is altogether too easy for people to misunderstand or conflate different legal terms or financial systems.

If you have recently encountered financial hardship because of debt that you can’t repay, you may have seen people talking about bankruptcy, as well as reorganization. While these terms may seem synonymous at first. There are distinctions between bankruptcy and reorganization of debt that you need to understand as you weigh your options.

Bankruptcy usually focuses on the discharge of debt

When an individual has more debts than they can repay, filing for bankruptcy can help them regain control of their financial circumstances.

Bankruptcy starts with a filing and the courts issuing an automatic stay of collection activity which can stop foreclosures and lawsuits while someone waits for their day in court. After necessary educational courses and meetings, successful bankruptcy petitioners will receive a discharge of their eligible unsecured debts.

A Chapter 7 bankruptcy discharge usually comes quickly. In a Chapter 13 bankruptcy for a person or business, there is usually a multi-year repayment plan to complete prior to discharge. In Chapter 11 bankruptcy, a business first restructures its debt before discharge.

Restructuring debt is often an option for businesses

In theory, anyone can go through debt restructuring. By negotiating new terms with lenders, anyone who owes money can potentially avoid ruining their credit and falling behind on their obligations through restructuring. Negotiating debts and their repayment can often be a crucial part of the Chapter 13 bankruptcy process.

Restructuring debt is a key part of Chapter 11 bankruptcy for businesses as well. When a company goes through a rough financial time or experiences growing pains, it may choose to reorganize or restructure. Restructuring debt often requires both an understanding of financial contracts and negotiating skills. You will have to find a solution that works for you and then propose it to a creditor in a way that appeals to them, which can be difficult for the average person.

Overwhelming debt can impact your happiness and even your health. You owe it to yourself to look at all of your options before deciding whether bankruptcy or other debt solutions will improve your situation.

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