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Bankruptcy Law: An Overview

Bankruptcy provides a second chance for individuals unable to meet their financial obligations. Bankruptcy can set debtors on the path to financial freedom. Options include liquidating assets and establishing a reasonable repayment plan. This allows a debtor to clear their debt without suffering additional financial hardship.

For more information about filing a bankruptcy petition, talk to an experienced bankruptcy law attorney.

When Should I File for Bankruptcy?

If you are in deep credit card debt, going through the bankruptcy process can give you a fresh start. However, bankruptcy is not for everyone. Certain debts, including child support and student loans, are not discharged in bankruptcy. Bankruptcy also means you may have to sell off many of your assets.

Before going through bankruptcy proceedings, your attorney may be able to negotiate a repayment plan to avoid insolvency. Some creditors will negotiate payment plans, which can help you pay off your debts without going through bankruptcy.

Bankruptcy court may be the best choice after you have exhausted all other options. You might be facing a lawsuit, foreclosure, or wage garnishment. Debt collectors might be calling at all hours. Bankruptcy can put an automatic stay on collections and legal actions.

What Are Your Options for Personal Bankruptcy?

There are different types of bankruptcy named after the U.S. Bankruptcy Code titles. The most common options for individuals are Chapter 7 or Chapter 13. Other types of bankruptcy include:

  • Chapter 9 bankruptcy for municipalities
  • Chapter 12 bankruptcy for family farms and fisheries
  • Chapter 15 bankruptcy for cross-border cases

Under Chapter 7 bankruptcy, your assets are sold to pay some of your debts. This is liquidation bankruptcy. In 2005, Congress passed the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA). This made filing for Chapter 7 more difficult, with stricter eligibility requirements.

Chapter 13 is reorganization bankruptcy. With Chapter 13, you keep your assets but create a plan to repay a large portion of your debt. Usually, the plan spreads payments out over three to five years.

Each form of bankruptcy has its own eligibility requirements and limitations.

Filing Chapter 7 Bankruptcy

Chapter 7 is the most common form of personal bankruptcy. The bankruptcy court uses the means test for eligibility. The means test compares your regular annual income to your debt. If a bankruptcy judge determines you have enough income and assets to pay off your debts, you may not file Chapter 7. Instead, you can convert it to a Chapter 13 filing.

If you qualify for Chapter 7, the court appoints a bankruptcy trustee to take any nonexempt assets. The trustee will sell the debtor’s estate and distribute the money to creditors. The whole process will take about four to six months. You must also complete a credit counseling course before discharging your debts.

The trustee doesn’t sell all the debtor’s assets in bankruptcy. Some property and assets are exempt. Bankruptcy exemptions can vary greatly by state law. Examples of exempt property include:

  • Pensions
  • Automobiles (up to a certain value)
  • Necessary clothing
  • Necessary furniture
  • Household appliances
  • Jewelry (up to a certain value)
  • Tools of their profession or trade
  • Public benefits such as Social Security

Chapter 13 Bankruptcy Filing

With Chapter 13 bankruptcy, you don’t have to sell all your assets. Instead, you develop a repayment plan to pay off a lot of your debts over time. The court will still ask for detailed financial records and require you to go through credit counseling. You must show you have enough income and assets to make the monthly payments.

Chapter 13 payments usually continue for 3 to 5 years. At the end of the repayment period, qualifying debts are discharged. Chapter 13 can be a good option for individual debtors who are facing foreclosure as a way to keep their home.

Chapter 11 Bankruptcy for Small Business Owners

Chapter 11 bankruptcy is the most common form of bankruptcy for businesses, including small business owners. Chapter 11 bankruptcy allows businesses to reorganize their debts—making it a good option if you want to keep your business going.

Title 11 bankruptcy can be complicated. The company must propose a detailed plan of reorganization. They often have to negotiate for approval with creditors. If the business and creditors cannot agree on a reorganization plan, the bankruptcy may be converted to a Chapter 7 filing.

Chapter 11 bankruptcy can provide businesses with a fresh start. It can also result in creditors getting partial ownership. Business owners must weigh the costs and benefits when considering whether bankruptcy is the right move.

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