Bankruptcy: A Solution for your Debt?

Bankruptcy is the legally declared inability of an individual or organization to pay its creditors. Through bankruptcy laws, individuals or organizations can develop a plan that allows the debtor to resolve any debts by dividing his or her assets among creditors. Filing for bankruptcy may be much more common than people think and it can be the best way to get out of a bad situation. However, filing for bankruptcy is also a major, life altering decision that can affect the debtor's future credit and limit his or her ability to apply for things that require a good credit rating, such as credit cards or car loans. As such, filing with the aid of a bankruptcy attorney might be a good idea.

Bankruptcy Law

There are a variety of reasons why people face bankruptcy and many are not the fault of the debtor. For example, some people face bankruptcy because a medical crisis has resulted in exceedingly high medical bills. Others face bankruptcy when they lose their job, often as a result of downsizing. No matter what leads to bankruptcy, the end result is that the debtor can no longer pay off its debts to its creditors.

Bankruptcy laws can be confusing because there are different chapters—sections of the law—that apply to different people and organizations, and bankruptcy claims and exemptions can be dependent on individual state laws. Bankruptcy law is federal and is contained in Title 11 of the United States Code. Although individual states cannot regulate bankruptcy, they can pass laws that regulate other aspects of debtor-creditor relationships, such as property exemptions.

Chapter 7: Liquidation

Chapter 7 of the Bankruptcy Code is the most common form of bankruptcy and involves liquidation of the non-exempt property of the debtor. "Liquidation" simply means the non-exempt property is sold in order to generate available cash that can then be given to o the creditors to pay off any debts. Although the debts will be forgiven—most unsecured debts are written off shortly after Chapter 7 is filed—the bankruptcy stays on the debtor's credit report for 10 years. Relief under Chapter 7 is available to individuals, partnerships, corporations or other business entities.

Property exemptions vary from state to state. For example, in Florida and Texas, debtors can keep their home, no matter how much the home is worth. However, some states exempt only a limited amount of the home equity.

Chapter 11: Reorganization

Chapter 11 is usually filed so that a business—a corporation, sole proprietorship or partnership—can be reorganized. There are no limits to the amount of debt that the debtor can have when filing for Chapter 11 bankruptcy. Large businesses that are trying to restructure their debt will usually file Chapter 11 bankruptcy.

Under Chapter 11, the debtor generally remains in possession of its assets but operates under the supervision of the courts for the benefit of creditors.

Chapter 12: Family Farmer or Family Fisherman Bankruptcy

Chapter 12 is similar to Chapter 13 (see below) but is only used by family farmers and family fishermen in specific situations. Chapter 12 allows family farmers or family fishermen to carry out a plan to repay some or all of their debts, usually over a three to five year period. Chapter 12 filings are less complicated and less expensive than Chapter 11 bankruptcy filings.

Chapter 13: Individual Debt Adjustment

Chapter 13 is a more complex reorganization than Chapter 7 and allows the debtor to keep some or all of the property and use future earnings to pay back creditors. The debts can be paid back over time, usually between three and five years. Under Chapter 13, individuals may save their homes from foreclosure and may reschedule secured debts. Also under Chapter 13, the individual actually makes payments to a Chapter 13 trustee. The trustee then distributes payments to creditors, meaning that the individual has no direct contact with creditors while Chapter 13 protection is in effect. Chapter 13 is only available to individuals and not to companies.

Bankruptcy Lawyers

Bankruptcy lawyers can help to prevent wage garnishments, repossessions, foreclosures, bankruptcy lawsuits and creditor harassment. Furthermore, bankruptcy attorneys can provide debt and bankruptcy consultations to evaluate the debtor's credit card debts, loans and mortgages.

Determining which type of bankruptcy to file can be a difficult process. Experienced bankruptcy attorneys can help to navigate the complex issues surrounding bankruptcy, to ensure that your rights—and your assets—are protected.