Colloquially known as going out of business, bankruptcy is also a legal mechanism where ongoing business concerns shed some debts and restructure others. Personal bankruptcies normally fall into Chapter 7 (discharge) or Chapter 13 (repayment), while business bankruptcies are generally Chapter 7 or Chapter 11 (reorganization).
For individuals, bankruptcy is an important part of the legal code that allows individuals to get a fresh start when they have run into financial problems that they can’t easily solve. In bankruptcy, a court will rule on what debts you are capable of repaying, which should be restructured, and which should be forgiven. Debts that are secured with real property, like a mortgage, are generally not dischargeable because the security from the collateral cannot be wiped out. Additionally, certain privileged debts like student loans and tax debts are prevented from being discharged in most normal circumstances.
For businesses, bankruptcy is designed to allow the business to remain viable and keep the employees employed while restructuring the finances to become an ongoing concern. During the Chapter 11 bankruptcy, generally the shareholders lose their ownership of the company and management and the courts restructure the debts to take ownership of the company to help restore the balance sheet. The goal of a business reorganization is to leave the company able to resume functioning as a viable entity.
If the company cannot be restructured to be a profitable and viable company, than bankruptcy provides an orderly dissolution of the company. This ensures that creditors are paid fairly, albeit in a partial manner, as the company is shut down and its assets liquidated.
Because asset protection is a series of financial strategies to protect your wealth from lawsuits and creditors, it is entwined with the bankruptcy laws of your state. Asset protection revolves storing wealth in assets that you retain after a chapter 7 bankruptcy, because the fact that the assets are not “attachable” often prevents the lawsuit in the fist place.