Declaring bankruptcy is a way to either eliminate or reduce existing debt which is an option for individuals and corporations who are having trouble with their debts. However, not everyone can just declare bankruptcy and get away of their debts. There are processes and there are classifications as to who qualifies to the declaration of bankruptcy.
Corporations and other big companies are qualified to file for Chapter 11 Bankruptcy. Companies which file under this category are usually those who are looking for a way to restructure their debts and have better payment terms. Filing under Chapter 11 requires a lot of money and the assistance of lawyers and consultants. The board of directors must decide how the company will pay the existing debt after filing for bankruptcy. Also, the amount of debt in Chapter 11 is usually high valued compared to other categories. In most cases, companies clear off their debts by paying bonds or shares.
On the other hand, individuals are qualified to file for bankruptcy under Chapter 13 Bankruptcy and Chapter 7 bankruptcy. In this category of bankruptcy, individuals can either clear off their existing debts by paying a portion of the debt or paying the debt in agreed period of time without incurring any interest. Chapter 7 bankruptcy falls for individuals who do not have enough source of income to pay for the debt or own other properties that they can sell to pay for the debt. Once approved of Chapter 7 filing, the individual is totally cleared of the debt and is given a fresh start with no obligation to pay for the debt incurred. Meanwhile, individuals who are not qualified for Chapter 7 are moved to Chapter 13 bankruptcy. Once proven that they have enough income that could pay for the debt, the law automatically disqualifies them for Chapter 7. Instead of clearing the debt, the debtor is required to pay for the incurred debt for a certain period of time without added interest until the debt is cleared.