Frequently Asked Questions About Bankruptcy

Frequently Asked Questions About Bankruptcy

What Is Bankruptcy?

Bankruptcy is a legal proceeding involving a person or business that is unable to repay its outstanding debts. The bankruptcy process begins with a petition filed by the debtor, which is most common, or on behalf of creditors, which is less common. All of the debtor's assets are measured and evaluated, and the assets may be used to repay a portion of outstanding debt.

Understanding Bankruptcy

Bankruptcy offers an individual or business a chance to start fresh by forgiving debts that simply cannot be paid while giving creditors a chance to obtain some measure of repayment based on the individual's or business's assets available for liquidation. In theory, the ability to file for bankruptcy benefits the overall economy by allowing people and companies a second chance to gain access to credit and by providing creditors with a portion of debt repayment. Upon the successful completion of bankruptcy proceedings, the debtor is relieved of the debt obligations that were incurred before filing for bankruptcy.

All bankruptcy cases in the United States are handled through federal courts. Any decisions in federal bankruptcy cases are made by a bankruptcy judge, including whether a debtor is eligible to file and whether they should be discharged of their debts. Administration over bankruptcy cases is often handled by a trustee, an officer appointed by the United States Trustee Program of the Department of Justice, to represent the debtor's estate in the proceeding. There is usually very little direct contact between the debtor and the judge unless there is some objection made in the case by a creditor.

Bankruptcy filing


Bankruptcy Filings

Bankruptcy filings in the United States fall under one of several chapters of the Bankruptcy Code, including Chapter 7, which involves the liquidation of assets; Chapter 11, which deals with company or individual reorganizations; and Chapter 13, which arranges for debt repayment with lowered debt covenants or specific payment plans. Bankruptcy filing costs vary, depending on the type of bankruptcy, the complexity of the case, and other factors.

Chapter 7 Bankruptcy

In Chapter 7, debts are discharged, usually by forfeiting the property to the bankruptcy trustee to attempt to satisfy the outstanding debts. Debtors are allowed to keep a certain amount of property, called "exemptions." Exempt property cannot be seized during the bankruptcy procedure.

The big drawback to Chapter 7 is that property subject to a security interest, like a home or a car, is not exempt and can almost always be seized to satisfy the indebtedness related to that particular item. So if you can afford to make payments on items subject to a security interest and still want to keep them, even though you are behind on your payments, then Chapter 7 is probably not the best choice because it does not prevent secured creditors from taking your property to satisfy your debt.

Chapter 11 Bankruptcy

Businesses often file Chapter 11 bankruptcy, the goal of which is to reorganize, remain in business, and once again become profitable. Filing Chapter 11 bankruptcy allows a company to create plans for profitability, cut costs, and find new ways to increase revenue. Their preferred stockholders, if any, may still receive payments, though common stockholders will not.

For example, a housekeeping business filing Chapter 11 bankruptcy might increase its rates slightly and offer more services to become profitable. Chapter 11 bankruptcy allows the business to continue conducting its business activities without interruption while working on a debt repayment plan under the court's supervision. In rare cases, individuals can also file for Chapter 11 bankruptcy.

Chapter 13 Bankruptcy

In Chapter 13 bankruptcy you file a repayment plan in court showing how you will pay off your debts over the next three to five years. The big benefit to Chapter 13 is that it prevents your creditors from harassing you and allows you to keep property subject to a security interest, as long as you make the payments required under your repayment plan. In most cases, these payments must be at least as much as the monthly payments required by the contract establishing the original debt, plus whatever extra amount is required to get caught up. Chapter 13 may be the best choice for you if you are behind on debt payments but can catch up given enough time.

Of course, for most people in this situation, it is usually possible to work out a payment plan directly with the creditors rather than ever filing bankruptcy. It is much more advisable to handle things that way, if possible because you save your court and attorney fees for filing the bankruptcy and do less damage to your credit.

Other Bankruptcy Filings

While Chapter 7, Chapter 11, and Chapter 13 are the most common bankruptcy proceedings, especially as far as individuals are concerned, the law also provides for several other types:

  • Chapter 9 bankruptcy is available to financially distressed municipalities, including cities, towns, villages, counties, and school districts. Under Chapter 9, municipalities do not have to liquidate assets to repay their debts but are instead allowed to develop a plan for repaying them over time.
  • Chapter 10 bankruptcy, which effectively ended in 1978, was a form of corporate bankruptcy that has been supplanted by Chapter 11.
  • Chapter 12 bankruptcy provides relief to family farms and fisheries. They are allowed to maintain their businesses while working out a plan to repay their debts.
  • Chapter 15 bankruptcy was added to the law in 2005 to deal with cross-border cases, which involve debtors, assets, creditors, and other parties that may be in more than one country. This type of petition is usually filed in the debtor's home country.

Bankruptcy filings

What Are Chapter 7 Bankruptcy Exemptions?

The purpose of bankruptcy is to help people get back on their feet and regain control of their financial situation. To help with this process, the government created a set of exemptions to help individuals maintain their quality of life, while still resolving their issues with creditors. In determining which property is exempt, you can use either state law or federal law. In many cases, the federal exemptions are more generous. They include:

$16,500 in equity in your home

$2,575 in equity in your car

$425 per item in any household goods up to a total of $8,625

$1,625 in job-related tools, books, etc.

$850 in any property, plus part of the unused exemption in your home, up to $8,075

Your right to receive social security, unemployment, VA benefits, welfare, and pensions, regardless of the amount

The exemption amounts above are doubled when a married couple files together.

For more information on whether you should elect to use federal or state bankruptcy exemptions, contact a local bankruptcy attorney in your jurisdiction.

Being Discharged From Bankruptcy

When a debtor receives a discharge order, they are no longer legally required to pay the debts specified in the order. What's more, any creditor listed on the discharge order cannot legally undertake any type of collection activity (such as making phone calls or sending letters) against the debtor once the discharge order is in force.

Disclaimer: Every effort has been made to ensure the accuracy of this publication at the time it was written. The information provided on is not intended to provide legal advice or suggest a guaranteed outcome as individual situations will differ and the law may have changed since publication. Readers considering legal action should consult with an experienced lawyer to understand current laws and. how they may affect a case.