What is bankruptcy?
Bankruptcy law is designed to benefit both
debtors and creditors by seeing that debtors
get relief from debts they can't pay, and that
creditors get paid from whatever assets the
debtor does not need to live going forward.
Bankruptcy is governed by the federal law found
in Title 11 of the United States Code. As
federal law, it supersedes any conflicting
state law, so, with the exception of
exemptions, bankruptcy law is the same from
state to state.
What types of bankruptcy are there?
There are four kinds of bankruptcy proceedings.
They are referred to by the chapter of the
federal Bankruptcy Code that describes
* Chapter 7 - The Atom-Bomb Bankruptcy (the
most common, but not always the best)
* Chapter 11 - Business Bankruptcy or
Over-Limits for Chapter 13 (most expensive) -
most large companies reorganize under Chapter
* Chapter 12 - Farmers bankruptcy is a
simplified reorganization for family farmers,
where the debtor retains his property and pays
creditors out of future income.
* Chapter 13 - Repayment Plan
Chapter 7 Bankruptcy
Chapter 7 is the most common form of
bankruptcy. It is a liquidation proceeding in
which the debtor's non-exempt assets, if any,
are sold by the Chapter 7 trustee and the
proceeds distributed to creditors according to
the priorities among creditors established in
the Code. Chapter 7 is available to
individuals, married couples, corporations and
partnerships. Individual debtors typically get
a discharge within 4-6 months of filing the
case. If there are assets which are not exempt,
the trustee takes control of those assets,
sells them and pays creditors as much as the
proceeds permit. Any wages the debtor earns
after the case is begun are the debtor's; and
the creditors have no claim on those earnings.
A bankruptcy attorney can advise you regarding
which of your assets will be exempt from
liquidation, and what you can expect for the
Chapter 11 - Business or Over-Limit Individual
Payment Plan Reorganization
Chapter 11 is a reorganization proceeding,
typically for corporations or partnerships.
Individuals whose debts are too high to qualify
for a Chapter 13 repayment plan may also file
under Chapter 11. In Chapter 11, the debtor
usually remains in possession of his assets and
continues to operate any business, subject to
the oversight of the court and the creditors
committee. The debtor proposes a plan of
reorganization which, upon acceptance by a
majority of the creditors, is confirmed by the
court and binds both the debtor and the
creditors to its terms of repayment. Plans can
call for repayment out of future profits, sales
of some or all of the assets, or a merger or
recapitalization. If you have a business with
significant debt, you may need to consult with
a bankruptcy lawyer regarding the
Chapter 13 - Repayment Plan
Chapter 13 is a repayment plan for individuals
with regular income and unsecured debt less
than $336,900 and secured debt less than
$1,010,650. The debtor keeps his property and
makes regular payments to the Chapter 13
trustee out of future income to pay creditors
over time (3-5 years). Repayment in Chapter 13
can range from 1% to 100% depending on the
debtor's income and the type of the debt.
Chapter 13 also provides a mechanism for
individuals to prevent foreclosures and
repossessions, while catching up on their
secured debts. In certain circumstances,
debtors can reduce the balance of loans on
vehicles or discharge second mortgages or home
equity lines of credit. These types of
discharges can be complex, though, and
typically require the assistance of an
Sometimes bankruptcy is the only option.
Sometimes settling debts outside of bankruptcy
is an option. A bankruptcy attorney will help
you to assess when debt settlement might be an
Do you have assets that would be "non-exempt"
You consult with a bankruptcy attorney in your
state to see whether you can protect all of
your assets in bankruptcy. If you have
"non-exempt" assets that you wish to keep, then
Chapter 7 bankruptcy may not be an option.
Chapter 13 bankruptcy may still be available,
but may be less desirable than non-bankruptcy
Why should you hire a bankruptcy
There are many questionable "debt settlement"
companies out there. Often these companies
require up front “fee” payments,
often amounting to thousands of dollars, which
are non-refundable, even if they fail to reach
settlement with your creditors. An attorney
will have credibility when telling your
creditors that if a settlement cannot be
reached, a bankruptcy notice will be
forthcoming. Many bankruptcy attorneys will
agree to try non-bankruptcy debt settlement
before filing a bankruptcy case on your
It is not recommended that you file bankruptcy
without the assistance of an attorney. The
Bankruptcy Code is complex and contains
pitfalls that are not necessarily foreseeable
prior to filing.. Based on the factual and
legal complexity of your case, a qualified
bankruptcy attorney will be able to offer you a
customized solution to your situation.
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