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Introduction to bankruptcy, the different types of bankruptcy, and the bankruptcy process.

Updated: Apr 6, 2023

Woman in Debt Facing Bankruptcy

Overview of Bankruptcy: Types, Process, and Considerations

Bankruptcy is a legal process that allows individuals and businesses to restructure or eliminate their debts. It is designed to give people a fresh start financially by allowing them to discharge their debts or create a repayment plan to pay off their debts over time.

There are several different types of bankruptcy, each of which is designed to address different financial situations. The most common types of bankruptcy for individuals are Chapter 7 and Chapter 13.

Chapter 7

Chapter 7 bankruptcy, also known as a "liquidation" bankruptcy, involves the sale of a person's non-exempt assets in order to pay off their debts. This type of bankruptcy is generally best for people with few assets and high levels of unsecured debt, such as credit card debt. After the assets are sold, the remaining debt is typically discharged, meaning the individual is no longer responsible for paying it.

Chapter 13

Chapter 13 bankruptcy, also known as a "reorganization" bankruptcy, involves the creation of a repayment plan to pay off debts over a period of three to five years. This type of bankruptcy is generally best for people with a regular income and assets they want to keep, such as a house. In a Chapter 13 bankruptcy, the individual must use their disposable income to make payments towards their debt according to the repayment plan. Any remaining debt is typically discharged at the end of the repayment period.

Do I need an attorney for a Chapter 13?

This form of bankruptcy is very intensive and judges will warn debtors without an attorney that their likelihood of success is much smaller without one. Bankruptcy attorneys have access to sophisticated software and the knowledge of the local bankruptcy rules and practices that are critical for getting a plan approved and some of this knowledge only comes from direct experience. For example, each of the Chapter 13 Trustees has preferred language with respect to the treatment of tax refunds. A pro se debtor would need to know that such language exists and then find the exact wording which in no published in the statutes or local rules.

Other types of Bankruptcies

There are also other types of bankruptcy, such as Chapter 11 bankruptcy, which is typically used by businesses to restructure their debts, and Chapter 12 bankruptcy, which is specifically for family farmers and fishermen.

What happens when you file

The bankruptcy process begins when an individual or business files a bankruptcy petition with the bankruptcy court. This triggers the automatic stay, which is a legal injunction that prohibits creditors from trying to collect on debts. The individual or business must then attend a creditor meeting, during which they will be asked questions about their debts and assets by a bankruptcy trustee.

If the bankruptcy is successful, the individual or business will receive a discharge, which releases them from the legal obligation to pay their debts. However, not all debts are dischargeable in bankruptcy, such as student loans and child support payments.

Afterwards it is important for individuals to take steps to rebuild their credit and improve their financial health. This may include obtaining credit counseling, establishing a budget, and making on-time payments on any remaining debts. Overall, bankruptcy can be a helpful tool for people facing overwhelming debt, but it is important to carefully consider all options and seek the advice of a bankruptcy attorney before making a decision.

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