What Is Bankruptcy?

Bankruptcy offers a path to relief from overwhelming debt.

Bankruptcy offers a path to relief and much-needed debt management. For people facing financial difficulties, bankruptcy can be a key decision. It is a court-supervised process where a person legally declares themselves unable to pay outstanding debts. Continue reading to uncover more about bankruptcy and how it works.

Bankruptcy: An Introduction

Two different types of bankruptcies are available to average people in debt, often called consumer debt. You might choose to:

• Determine a debt repayment plan schedule (Chapter 13)
• Discharge most if not all debts (Chapter 7)

Additionally, small businesses can declare business bankruptcy (Chapter 11 bankruptcy). This means the company will generally continue to operate with a reorganization and reduced debtor payments.

There is also Chapter 12 bankruptcy, which applies to family farmers and fishermen.

For those facing bankruptcy due to COVID-19, you may have special rules applicable to your case.

Chapter 7 and Chapter 13 Bankruptcy

Chapter 7 bankruptcy, also known as liquidation, dismisses most debts and gives you a fresh start. Some debts are dismissed or repaid because your property is sold to cover the debt. It is the most common chapter for filings.

Chapter 13 bankruptcy involves monthly payments as part of a court-ordered repayment plan. This will help you pay back most of your debt. It is helpful for people who want to keep their property but don’t have enough income or need more time to make payments.

How To Talk About Bankruptcy

It’s essential to understand the terms used in bankruptcy. If you decide to file for it, you will be declaring bankruptcy. Filing bankruptcy means starting the bankruptcy procedure, whether approved or not.

Bankruptcy for individuals, married couples, or domestic partners is distinguished by chapters. Each chapter corresponds to the actual chapter in the U.S. Bankruptcy Code, such as 11 U.S. Code Chapter 7. You must choose which chapter is best for you, file the petition with the courts, and wait to be approved.

After you file your petition, an automatic stay goes into effect. This stay stops most collection efforts against you by creditors or collections agencies.

The court will assign your case to a bankruptcy trustee. They will work with you throughout the process and create a plan for your debt. You can also hire a bankruptcy attorney to help you along the way.

A bankruptcy judge will approve or deny the trustee’s plan. You have not officially declared bankruptcy until your bankruptcy claim is approved through a court order.

After the bankruptcy process is complete, the court will remove your liability for certain debts. This is called debt discharge.

Is Bankruptcy a Good Idea for You?

You should consider many factors before filing your bankruptcy case. This includes understanding the following bankruptcy basics:

• Whether debt consolidation is a better option
• Types of debt, such as secured debt versus unsecured debt
• Federal court rules
• Whether your specific debts, such as credit card debt, are discharged or removed
• Debts you will still need to pay back, such as restitution for injuries caused by a DUI
• Non-exempt property
• Nondischargeable debts like student loans, child support, alimony/spousal support, and most tax debt
• Whether bankruptcy will help you keep your home, car, and specific other property protected from creditors’ claims or foreclosure
• Exemptions such as the Homestead Exemption
• The impact your declaration of bankruptcy will have on any co-signers

When you declare bankruptcy, it can hurt your credit rating and limit your financial options in the future, but staying in debt may do much more harm to both your credit rating and options in the long run. Your credit report will show you declared bankruptcy for the next seven to 10 years, though you can get out of debt much earlier than this seven- to 10-year period.

Eliminating Debt in Bankruptcy

Bankruptcy is a great option when you face overwhelming medical bills, credit card debt, and other unsecured debt, which is debt that does not have collateral. Other common debts that people get rid of in bankruptcy include debt from collection agency accounts, personal loans, past due utility bills, business debts, and past due rent.

To learn more about what debts you can and cannot eliminate in bankruptcy, see our page on Discharging Debt.

A Note on Eliminating Tax Debt

Very few tax debts get a bankruptcy discharge. You are still liable for most tax debt after bankruptcy, in particular federal taxes.

However, bankruptcy law allows the discharge of generally older tax debt only in some very limited circumstances. As a rule of thumb, a debtor is more likely to have tax debt discharged in Chapter 7 than in a Chapter 13 bankruptcy.

Should You Hire a Bankruptcy Attorney?

Handling debt and bankruptcy can be confusing and often overwhelming. Doing your research is essential, but sometimes consulting with an attorney is in your best interests.

An experienced bankruptcy and debt attorney will evaluate your case and explain all your legal options. This should cover everything from the bankruptcy process to more informal debt relief actions, such as negotiating with creditors and lenders and reaching a non-bankruptcy debt workout agreement.

For Chapter 7 filings, the average debtor can have their debts discharged within six months. For Chapter 13 filings, the process can take three to five years. In either case, having an attorney can help you navigate these proceedings.

If you plan to contact an attorney, use a checklist to gather the documents the attorney will need to see. This includes financial and legal records, a compilation of assets you own and debts you owe, and income verification.

United States Bankruptcy Courts 101

Bankruptcy courts are part of the federal judicial system. This means bankruptcy proceedings are governed by federal law. Specially designated bankruptcy courts handle bankruptcy in the fifty states, the District of Columbia, and Puerto Rico.

The bankruptcy courts are divided into districts that serve smaller geographic areas within larger or more populous states. Different states and municipalities have varying local rules, forms, and opinions that may impact your case.

If you live in a state with more than one district and are unsure which district you are in, most bankruptcy court websites provide lists or maps of counties within that district.

Before you file your bankruptcy petition, make sure you have listed every creditor you owe money. Failure to do so can result in the dismissal of your bankruptcy petition. Lying on a bankruptcy petition can result in a jail sentence for fraud.

Bankruptcy Forms and Resources

Whether you’re seeking information about credit counseling services or plan to file for bankruptcy protection, you’ll need to become acquainted with various legal forms, filing procedures, and government offices.

Without the proper guidance, navigating these forms and procedures can make bankruptcy filing a pretty overwhelming experience. You’ll want to:

• Find your state’s bankruptcy court directory
• Learn how to draft a "cease communications" letter to creditors
• Gather the correct documents
• Review U.S. bankruptcy laws to prepare yourself
• Get help from a credit counselor to develop a personalized plan for getting back on track

Working with a bankruptcy attorney who knows the ins and outs of the bankruptcy process is a good idea. You may also want to learn about standard definitions and explanations for frequently used words and phrases related to bankruptcy.

Bankruptcy Code: U.S. Code Title 11

The laws we follow for bankruptcy are parts of the United States Code. Title 11 covers all elements of federal bankruptcy law and what each chapter does.

Title 11 of the United States Code, often called the Bankruptcy Code, is like a legal road map for individuals and businesses facing financial hardships. It’s a tool that can help you navigate the complexity of debt and emerge on the other side with a fresh start. This Code offers different varieties of relief, offering options like Chapter 7 (the quick fix), Chapter 11 (the business reorganizer), and Chapter 13 (the financial planner).

Whether you’re looking to wipe the slate clean, revamp your financial strategy, or find a manageable path to repay your debts, U.S. Code Title 11 is your key to financial freedom.

2005 Bankruptcy Law Changes

The Bankruptcy Reform Act (2001) was only in effect for four years until reconsideration occurred in 2005. This set of rules is officially called The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005.

At the time, it was a significant reform of the bankruptcy system, including tighter eligibility requirements, such as:

• Chapter 7 applicants must meet specific eligibility requirements under a means test
• Chapter 7 or Chapter 13 applicants must show proof of their income by providing recent federal tax returns
• Most applicants must undergo credit counseling from a government-approved counseling agency before filing for any chapter
• Before debt discharge, bankruptcy debtors must participate in a government-approved financial management education program

Another change included removing some protections under the automatic stay. One key difference is that filing for bankruptcy may no longer stop eviction actions if the filing occurs after the eviction judgment has been entered.

How a Bankruptcy Attorney Can Help You Navigate U.S. Courts and the Legal Process

Bankruptcies occur for many reasons, from unexpected circumstances to poor financial planning. Everyone’s financial situation is different. Professional assistance can help you with debt settlement, stopping wage garnishment, and other issues that come with filing for bankruptcy.

Contact an experienced bankruptcy attorney to navigate bankruptcy, the federal courts, and for legal advice.