Bankruptcy is the process whereby the federal bankruptcy court either eliminates all consumer debt or approves a repayment plan proposed by the debtor. There are several different chapters of the bankruptcy code that allow for the discharge of debts. Which one works for you depends on your specific situation, income and type of debt that needs to be discharged.
According to a 1934 decision of the Supreme Court of the United States, bankruptcy laws are designed to give an “honest but unfortunate debtor a new opportunity in life…” often referred to as a “fresh start.” When a petition for bankruptcy is filed under any chapter, creditors are barred from continuing collection efforts unless they obtain a court order. Individuals, companies or corporations can all qualify for bankruptcy under any chapter. Here is an overview of the three main types of bankruptcy.
Chapter 7
Chapter 7 is often referred to as “liquidation bankruptcy” and is the vehicle used when debt is so overwhelming there is almost no hope of ever being able to repay it. It is used more by individuals than by businesses. In theory, the bankruptcy court can take the assets you have, sell them and use the proceeds to pay your creditors. In reality, a lot of property is exempt under state or federal bankruptcy law and most debtors do not lose assets to the bankruptcy court.
At the close of bankruptcy, most unsecured debts are discharged and debtors receive their fresh start. Not all debts are dischargeable, such as child and spousal support. Recent law subjects debtors to a “means test” to determine if they qualify for Chapter 7 relief.
Chapter 11
Chapter 11 is referred to as “reorganization bankruptcy” and applies when you or your company has significant debt that cannot be paid back at the current rate. It is most commonly used by businesses and allows them to continue operating while the debt is reorganized. The debt is restructured so it is manageable and some debts are discharged.
Chapter 13
Chapter 13 is a plan known as “adjustment of debts of an individual with regular income.” According to its title, the debtor must have a source of income. Debtors file a plan with the bankruptcy court for repaying their debts over a period of three to five years. During this time, no creditors can take any further action to collect the debt. At the end of the period, if the debtor has complied with the plan, remaining debts are discharged.
Attorney Stephen Burton of the Burton Law Offices is an experienced bankruptcy attorney who can help you decide if bankruptcy is the answer for you and if so, which type you qualify for.
Stephen Burton has served as an attorney for bankruptcy trustees, taught bankruptcy at the National Business Institute and practiced before the bankruptcy courts. He regularly attends continuing education classes. As a consequence, virtually every case he files is successful.