November 20, 2017

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Bankruptcy

Bankruptcy is a court process where a debtor (one who owes money) may legally lessen or eliminate (discharge) his or its debts.

There a number of different types of bankruptcy, and the process can be complicated, so it is wise to consult a Bankruptcy Attorney to ensure you make the right choice. View qualified Bankruptcy Law Firms in your area to find Bankruptcy Lawyers to get help with this process.

Bankruptcy Process

Although there are several different types of bankruptcy, they generally share the following characteristics:

Estate – the bankruptcy estate is the debtor’s property, but does not include property that is exempt or excluded.
Automatic stay – once the bankruptcy is started (by filing a petition), creditors (those to whom money is owed) may not take actions to collect their debt outside of bankruptcy court.
Discharge – the debtor is given a “fresh start,” and the debts are, generally, eliminated.

Types of Bankruptcy

Bankruptcy may be involuntary, but voluntary bankruptcy is much more common. The most common types of bankruptcy are:

  • Chapter 7 – allows individuals and businesses to completely discharge their debts
  • Chapter 11 – typically is used by businesses to reorganize their debts
  • Chapter 13 – the wage-earners plan allows individuals to reorganize their debts

Individuals

Chapter 7

In Chapter 7, the estate will come under the control of the bankruptcy trustee (an official with the court) who will sell all non-exempt assets, and use the proceeds to pay, to the extent possible, your outstanding debts. At the end of the process, all of your debts, other than those specifically excluded, are discharged (you no longer owe on those debts).

State laws vary, but typical exempt property (property that will not be sold to pay debts) includes:

  • Home – the primary residence of the debtor
  • One auto
  • Clothing
  • Household goods

Debts that cannot be discharged include:

  • Support obligations – usually child support or alimony
  • Student loans
  • Outstanding taxes

In addition, in some circumstances, an individual may be able to redeem property that is covered by a lien.

Chapter 13

This chapter allows the debtor to, typically, lessen his debt obligation without losing ownership or control over his assets. Generally, a payment plan is established where most of the debtor’s income is applied to pay the outstanding debt for three to five years. If the plan is completed, all non-excluded debts are discharged.

Businesses

Chapter 7

Like individuals, businesses may choose to file under Chapter 7. Since all of the assets are sold, the business is liquidated and it will be dissolved (no longer exist) when the proceedings end.

Chapter 11

When it is desirable for the business to continue after bankruptcy, Chapter 11 is usually chosen as a method to re-work the business’s debts, while maintaining its operations. Typically, the business’s creditors participate in creating a reorganization plan, in which each (usually) agrees to lessen its obligation with the hope that at least some of the debt will be paid.

Related areas:

Creditor/Debtor, Collections, Garnishment, Foreclosure, Secured Transactions