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Bankruptcy Law: An Overview

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Bankruptcy law provides a second chance for individuals and businesses unable to meet their financial obligations. Depending on the type of bankruptcy, it can set debtors on the path to financial freedom by either liquidating existing assets or establishing a reasonable repayment plan. Doing so allows a debtor to gradually pay off a portion of the debt without suffering additional financial hardship.

When Should I File for Bankruptcy?

Bankruptcy is not the best option for everyone. Certain debts, such as child support, student loans, and criminal restitution, can't be discharged in bankruptcy. This means filing for bankruptcy would not make those debts go away. Plus, some creditors are willing to negotiate payment plans on their own, which can help someone pay off their debts without going through bankruptcy.

In most cases, a person will file for bankruptcy when they have exhausted all other options. They might be facing a lawsuit, foreclosure, or wage garnishment. Debt collectors might be calling them at all hours of the day. Bankruptcy can protect you from these activities. When someone files for bankruptcy, all collection activities stop, and even repossession can be delayed.

Options for Personal Bankruptcy

Most often, individuals file for bankruptcy under either Chapter 7 or Chapter 13 of the Bankruptcy Code. Under Chapter 7, a person's assets are sold to pay some of their debts. This is known as “liquidation bankruptcy.”

Chapter 13 is called “reorganization bankruptcy.” With a reorganization bankruptcy, the person keeps their assets but creates a plan to repay a sizable portion of their debt. Usually, the plan spreads payments out over 3 to 5 years.

Each form of bankruptcy has its own eligibility requirements potential filers must meet to qualify.

Chapter 7

Chapter 7 is the most common form of bankruptcy. Eligibility is typically determined by income, with the state median income serving as a benchmark. Chapter 7 is a good option for someone who earns less than the state median income since they would probably struggle to pay off their debts in a payment plan.

Those filing for Chapter 7 bankruptcy must provide detailed financial information, including:

  • Income information
  • Tax returns
  • Records of outstanding debts
  • Living expenses

They must also undergo credit counseling and provide the court with evidence of completion. Then, their assets are sold, and the proceeds distributed among all applicable creditors. Some assets are exempt, meaning they cannot be sold to pay off debts in bankruptcy. When someone files for Chapter 7, they can usually keep:

  • 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

When that process is complete, any remaining debts are discharged – the slate is wiped clean.

Chapter 13

Filing for Chapter 13 bankruptcy is very similar to the process for Chapter 7. Credit counseling is required, and the court asks for detailed financial records. Someone filing for Chapter 13 bankruptcy must have an income high enough to make the monthly payments. Their debt also must be below a certain threshold to be eligible.

Though the payments typically continue for 3 to 5 years, most collection activity stops immediately when Chapter 13 bankruptcy is filed. This includes collections notices, calls, wage garnishments, bank levies, and even some foreclosure activity.

Chapter 11

Chapter 11 bankruptcy is the most common form of bankruptcy for businesses. While an individual can file Chapter 11, it is challenging to meet the requirements on your own. Chapter 11 bankruptcy allows companies to reorganize their debts – making it the best option for those who want to keep their business going.

This type of bankruptcy can be very complicated. The company must propose a detailed reorganization plan. They often have to negotiate the arrangement with creditors. If both parties cannot agree on a reorganization plan, the bankruptcy may be altered to a Chapter 7 filing, or the case may be discharged altogether.

Chapter 11 bankruptcy can provide businesses with a fresh start. Still, it can also result in at least partial ownership being relinquished to creditors. Business owners must weigh the costs with the benefits when considering whether bankruptcy is the right move.

Speak to an Experienced Bankruptcy Attorney Today

This article is intended to be helpful and informative. But even common legal matters can become complex and stressful. A qualified bankruptcy lawyer can address your particular legal needs, explain the law, and represent you in court. Take the first step now and contact an attorney in your area from our directory to discuss your specific legal situation.

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