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A common term used to mean insolvency. Insolvency means that a person or company's liabilities exceed the assets, or where current cash flow is insufficient to pay current debts.

When this happens, the debtor can choose to take advantage of protections offered by the Bankruptcy Code. After filing for bankruptcy, the law provides an automatic stay on all collection activities.

There are three major types of Bankruptcy:

  • Chapter 7 Bankruptcy
  • Chapter 11 Bankruptcy
  • Chapter 13 Bankruptcy

Chapter 7 Bankruptcy: Liquidating all assets with the purpose of paying down as much of the liabilities as possible, then receiving a discharge of any remaining debts and a "fresh start".

Chapter 11 Bankruptcy: Also referred to as reorganization, a debtor usually sells some assets, forgiveness of some debt, and a long term repayment schedule to repay the remaining debt. Chapter 11 is similar to Chapter 13 but for businesses or individuals who exceed the financial limitations of Chapter 13.

Also referred to as "wage earner's bankruptcy", the debtor proposes a repayment plan usually lasting between 3-5 years, takes government approved credit counseling, and if they meet the conditions of their repayment plan, receive a discharge of the remaining debts at the end.

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