On this page you will read detailed information about Bankruptcy Law in the United States.
As a citizen navigating personal finances and business affairs, understanding bankruptcy law equips you to make informed decisions. This overview examines key principles governing federal bankruptcy statutes. In 100 words, the discussion summarizes provisions related to chapters 7, 11, 12, and 13 bankruptcies. Gaining literacy regarding the purpose and procedures of liquidation, reorganization, and debt adjustment better positions you to evaluate options if financial distress arises. Knowledge also aids prudent planning for business or personal budgeting. Though complex, core bankruptcy concepts prove comprehensible when plainly explained.
Types of Bankruptcy: Chapter 7, Chapter 11, and Chapter 13
Chapter 7 Bankruptcy
Chapter 7 bankruptcy, also known as “liquidation bankruptcy,” involves eliminating most consumer debts. The debtor gives up certain assets to repay at least some portion of their debts. Any remaining debts are discharged or forgiven.
To qualify for Chapter 7 bankruptcy, you must meet certain income requirements based on the median income in your state. If your income is above the median, you must pass the “means test” to prove that you do not have enough disposable income to repay your debts over a 5-year repayment plan.
In a Chapter 7 case, a trustee is appointed to sell certain assets and distribute the proceeds to creditors. Some assets are exempt and the debtor is allowed to keep them. Exempt assets typically include a home, vehicle, clothing, household goods, life insurance, retirement accounts, and tools of the trade. The bankruptcy discharge is usually received 3-4 months after filing the petition.
Chapter 11 Bankruptcy
Chapter 11 bankruptcy allows businesses to reorganize their debts while continuing to operate. It is often referred to as “reorganization bankruptcy.” The debtor creates a repayment plan to restructure debt obligations and pay at least part of money owed to creditors over time. The plan must be approved by the creditors and the court.
Chapter 11 bankruptcy gives businesses time to restructure their finances to avoid closing down completely. It allows companies to eliminate debt, reduce interest rates, extend loan terms, and discharge portions of debt. Management is usually allowed to stay in control of day-to-day operations during the process.
Chapter 13 Bankruptcy
Chapter 13 bankruptcy, or “wage earner’s plan,” allows individuals with regular income to reorganize their debts and repay at least some portion of what they owe over 3-5 years. The debtor proposes a repayment plan to make installment payments to creditors over the life of the plan. Interest rates and monthly payments may be lowered to make repayment possible.
To qualify for Chapter 13, individuals must have steady income and less than $394,725 in unsecured debt (or $1,184,200 in secured debt). At the completion of the repayment plan, most remaining debts are discharged. Chapter 13 is a good option for those who want to catch up on mortgage or auto loan arrears over time and avoid foreclosure or repossession.
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Qualifying for Bankruptcy: The Means Test and Eligibility
To qualify for bankruptcy, you must meet certain legal requirements regarding your income and expenses. The “means test” compares your income to the median income in your state. If your income is below the median, you qualify for Chapter 7 bankruptcy. If above the median, you may still qualify for Chapter 13 bankruptcy, which requires a repayment plan.
To file for either Chapter 7 or 13 bankruptcy, you must pass an eligibility test confirming:
- You are an individual, married couple, or small business owner
- You have regular income or income from self-employment to repay at least some debts (for Chapter 13)
- Your debts do not stem from “willful or malicious” acts
- You complete approved credit counseling and debtor education courses
- You have not filed for bankruptcy in the past certain number of years (the “bankruptcy bar”)
If eligible, you must then compile financial documents to submit with your bankruptcy petition, including tax returns, pay stubs, utility bills, credit card statements, loan documents, and other evidence of your income and expenses. The court trustee will review this to verify the information in your petition and ensure you qualify for the type of bankruptcy sought.
Some debts like student loans, child support, and tax obligations typically cannot be discharged in bankruptcy. To have certain other debts like credit cards and medical bills discharged, you must not have engaged in fraudulent activity regarding them. The court may deny your petition if it appears you deliberately tried to avoid paying legitimate debts.
In summary, to obtain bankruptcy relief you need to establish you lack the means to repay a significant portion of your debts, did not incur debts dishonestly, meet procedural requirements, and obtain court approval of your petition. With preparation and honesty, many individuals are able to negotiate the bankruptcy process successfully and obtain a fresh financial start.
The Bankruptcy Process Step-by-Step
If you decide that filing for bankruptcy is the right choice for your financial situation, understand that it is a legal process with specific procedures to follow. The bankruptcy process in the United States involves several steps:
1. Determine the type of bankruptcy to file
The two most common types for individuals are Chapter 7 bankruptcy, which eliminates most debts, and Chapter 13 bankruptcy, which sets up a repayment plan to eliminate some debts and repay others. Meet with a bankruptcy attorney to evaluate your options based on your income, assets, and debts.
2. Complete mandatory credit counseling
You must complete a credit counseling course no more than 180 days before filing for bankruptcy. The course usually lasts around 90 minutes and can be done online, by phone, or in person. You will receive a certificate of completion to provide to the bankruptcy court.
3. File the bankruptcy petition
Your attorney will prepare and file the bankruptcy petition, schedules, and statements with the bankruptcy court. These documents list information such as your income, expenses, assets, and debts. Filing the bankruptcy petition automatically stops most collection activities against you.
4. Attend the meeting of creditors
About a month after filing, you will attend a short hearing where the trustee assigned to your case and your creditors may ask you questions about your bankruptcy petition and financial affairs. This is also known as the “341 meeting.” Your attorney will accompany you and help answer any questions.
5. Complete a debtor education course
You must take a second course, usually called debtor’s education or personal financial management course. Like the first course, you will receive a certificate of completion to provide to the bankruptcy court.
6. Receive discharge or make plan payments
In a Chapter 7 bankruptcy, you will receive a discharge of most debts usually within three to four months. In a Chapter 13 bankruptcy, you will make monthly plan payments to the trustee for three to five years until all payments are made and the remaining debts are discharged.
The bankruptcy process can be complex, but by understanding the basic steps and working closely with your attorney, you can eliminate debts and gain a fresh financial start. Let me know if you have any other questions!
The Pros and Cons of Declaring Bankruptcy
Declaring bankruptcy can offer relief from overwhelming debt, but it also negatively impacts your credit and finances. You should weigh the pros and cons carefully before filing for bankruptcy.
Pros of Bankruptcy
- Discharge of debt. The most significant benefit of bankruptcy is eliminating or reducing the amount you owe to creditors. Both Chapter 7 and Chapter 13 bankruptcies can discharge unsecured debts like medical bills, credit cards, and personal loans.
- Stop foreclosure or repossession. Filing for bankruptcy can stop foreclosure proceedings on your home or repossession of vehicles. A Chapter 13 repayment plan allows you to catch up on missed payments over 3-5 years.
- Protect assets. Chapter 13 bankruptcy allows you to keep certain valuable assets like your home or vehicle that might otherwise be sold to repay debts. You can catch up on any missed secured debt payments over the life of the repayment plan.
Cons of Bankruptcy
- Negative impact on credit. A bankruptcy stays on your credit report for up to 10 years and can significantly hurt your credit score, making it difficult to qualify for loans, credit cards, insurance, apartments, and jobs.
- Lose property. While Chapter 13 bankruptcy allows you to keep property, Chapter 7 bankruptcy may require you to surrender property to be sold to repay creditors. This could include your home, vehicles, and other assets.
- Future financial limitations. It may be difficult to open new lines of credit or get approved for loans for several years after declaring bankruptcy. Lenders view those with a recent bankruptcy as a high risk.
- Expense. Filing for bankruptcy comes with upfront court costs and attorney fees. The total cost will depend on the complexity of your case and state filing fees. It could cost between $500 to $3,000 or more for a bankruptcy lawyer.
- Damage to relationships. Bankruptcy can negatively impact relationships with landlords, creditors, and anyone else owed money. Some may no longer wish to do business with you due to the bankruptcy.
In summary, while bankruptcy offers the opportunity for a fresh start by eliminating debt, the long-term consequences can be damaging. Consider all options carefully and speak to a financial counselor to determine if bankruptcy is truly your best path forward.
Bankruptcy FAQs: Answering Common Questions on the Law
As individuals consider declaring bankruptcy, they often have many questions about the process and laws. Here are some of the most frequently asked questions regarding bankruptcy in the U.S.
The two most common types of bankruptcy for individuals are Chapter 7 bankruptcy, also known as “liquidation bankruptcy,” and Chapter 13 bankruptcy, also known as “restructuring bankruptcy.” Chapter 7 involves eliminating most debts, while Chapter 13 restructures debts into an affordable repayment plan.
A bankruptcy typically remains on your credit report for up to 10 years. Chapter 13 bankruptcies may remain for up to 7 years. While bankruptcy can hurt your credit score in the short term, declaring bankruptcy allows you to eliminate or reduce debt obligations and begin rebuilding your credit.
Filing for bankruptcy may temporarily halt foreclosures, repossessions, garnishments, and utility shut-offs. A Chapter 13 bankruptcy can allow individuals to catch up on missed mortgage payments over time. A Chapter 7 bankruptcy can eliminate the mortgage debt altogether, allowing the individual to avoid foreclosure. However, the home may still be at risk if payments cannot be made going forward.
Bankruptcy can eliminate or reduce tax debt in some cases. Income tax debt that is at least three years old can typically be discharged in Chapter 7 bankruptcy. Chapter 13 bankruptcy can sometimes reduce tax debt over a repayment period of up to five years. However, some tax debts like fraud penalties cannot be discharged in bankruptcy. It is best to consult with a bankruptcy attorney to determine if your tax obligations can be impacted.
The purpose of bankruptcy is to provide debt relief, not to eliminate all assets. You can typically keep most ordinary household goods and personal effects, vehicles, and other assets that do not have high resale value in a bankruptcy. However, the bankruptcy trustee can sell some nonexempt assets to repay at least part of your debts. Certain assets are fully protected, but state exemption laws determine which assets are protected and to what dollar amount. You should check with your state laws and discuss your assets with a bankruptcy attorney.
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