BANKRUPTCY INFORMATION CENTER 

Overview

In 2008, bankruptcy cases exceeded one million in the United States.  Individuals, in most cases, acquire debt over a long period.  Unexpected matters could arise to keep them from repaying the debit.  Examples include medical problems, loss of a job, divorce, failed business, disability, or death. 

Bankruptcy is a legal proceeding handled in a Federal bankruptcy court; however, state commercial and consumer laws have a role in some cases.  Bankruptcy relieves the debtor of some or all debts.  Bankruptcy provides help to individuals, businesses, farmers, municipalities or corporations that cannot pay their creditors because of severe financial problems. 

Reasons for bankruptcy include business failure, job loss, divorce, illness, or death.  Filing for bankruptcy is confusing and complicated; however, it can help you take care of your debts and give you a fresh start with your finances.   Bankruptcy may not be the best option for everyone; however, it can provide some people with a fresh start on the road to a debt-free life. 

Bankruptcy Types

Liquidation and reorganization are the types of bankruptcy available for those who need a fresh start. 

If you have ongoing income to continue paying creditors, reorganization bankruptcy (Chapter 13) is best for you.  If you are an individual with lower debts, Chapter 13 is best for your needs.  If you are an individual with high debts or a large business, filing for Chapter 11 is your best option. 

Farmers should file for reorganization under Chapter 12 and municipalities under Chapter 9.   

Chapter 7 (Liquidation)

Chapter 7 bankruptcy or liquidation bankruptcy is available to individuals and businesses.  Once you file for Chapter 7 bankruptcy, the court issues an automatic stay, which stops collection proceedings against you, the debtor.  The court appoints a trustee, who collects your non-exempt property, if you have any, and sells or liquidates them.  Once this process is complete, the proceeds pay off as many debts as possible.  If there are remaining debts that cannot be covered with the proceeds, they are discharged and no longer your responsibility.  This does not apply to businesses, however.  At the end of the process, a business closes down.  All assets were sold and the business can no longer make a profit.  In addition, an individual paying child support or alimony must continue to make these payments; these are non-dischargeable debts and will continue to be your responsibility.   

 

Chapter 11 (Businesses)

This option is mostly used by businesses who continue to operate during the process.  Once filing takes place, creditors are prohibited from collecting monies due them.   The business owner is required to create a plan of reorganization, which explains how he or she will conduct business and pay off his or her debts at the same time.  The creditors are allowed to propose their own plan for repayment and must give their approval for the business owner’s plan.  In the end, the court must approve the plan.  If a plan is not approved, the bankruptcy is converted to Chapter 7 or a liquidation bankruptcy. 

Chapter 13 (Wage-Earner Plan / Repayment Plan / Reorganization Plan)

If you have a regular income and believe this is only a temporary setback, Chapter 13 is the option for you.  In order to be eligible, your unsecured debt must be less than $308,000 and your secured debt less than $923,000. 

This option is a debt repayment and reorganization plan.  It generates an automatic stay for monies due.  This type of bankruptcy develops a three to five-year repayment plan through a bankruptcy trustee.  Students can include their student loans in their repayment plan.  Some taxes can be included also.  At the end of the 3-5 year period all remaining debt is dismissed – if all conditions of the agreement are met.  If you fail to make the payments over the 3-5 year period, your reorganization will convert to liquidation.  This also applies if you failed to pay child support, alimony or taxes during this time. 

Involuntary Bankruptcy

If the debt is minimal, creditors have a legal remedy through involuntary bankruptcy petitions under Chapter 7 and Chapter 11.  Filing improper involuntary petitions can result in huge penalties. 

Consumer Bankruptcy

If you fall behind in payments to creditors, you have the option of filing for bankruptcy.  The Federal Bankruptcy Law, or the Bankruptcy Code, consists of chapters that define the options available to you.  The most common choice for consumers is either Chapter 7 or Chapter 13. 

Credit Counseling Briefing

In 2005, the Bankruptcy Abuse Prevention/Consumer Protection Act was passed.  A debtor must attend credit counseling from an approved agency within 6 months of filing for bankruptcy.  The exception to this rule is when a creditor forces a debtor into bankruptcy first. 

Briefing is available in person, on the telephone or on the Internet.  The U. S. trustee has a list of approved credit counseling agencies for your use or you can find one on the US courts website.  The briefing offers opportunities for available credit counseling.  You will receive personalized feedback from the information you provide.  Once complete, you will receive an electronic delivery of your certificate of completion. 

 

Exceptions include immediate instances – a debtor made a request and the agency was unable to provide briefing within five days.  Other exceptions include a debtor that is physically impaired, in a combat zone (military duty), or mental illness. 

There are pros and cons to credit counseling.  Pro: Even though some people believe people turn to bankruptcy because of their own doing, agencies have found that more people have had good reason for turning to bankruptcy.  Con: By the time a person turns to bankruptcy, it is too late to help him or her. 

Credit Reports

A Chapter 7 bankruptcy will remain on your credit report for ten years from the date of filing.  Chapter 13 remains for seven years from the date of discharge and ten years from the date of filing if no discharge took place.   

Surviving Bankruptcy

Filing for bankruptcy causes an enormous impact on your life.  It causes emotions and feelings to run wild.  Losing money can affect your self-esteem.  It is important to know what caused your situation and how to keep your finances under control in the future.  You have been given a second chance – learn from this experience – do not allow this to happen again.  Once the feelings of shame have disappeared, move on with your life – take the road to a fresh start. 

Conclusion

If you're afraid to answer your phone because you know a creditor will be on the other end or you know your home, business or car is about to be repossessed, it might be time to contact an experienced bankruptcy attorney.  A skilled bankruptcy attorney will help you get out from debt and advise you of your options for a fresh start in life. 

Links to additional information

The American Bankruptcy Institute offers an enormous amount of information on consumer debts and bankruptcy.  Click on http://abiworld.org 

The Administrative Office of the U. S. Courts offers information on bankruptcy, court locations and provides forms that are needed to file for bankruptcy.  Visit their website at http://www.uscourts.gov/bankruptcycourts.html 

Fight identity theft by monitoring your credit report.  You can request a free credit report by visiting http://www.annualcreditreport.com

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