Bankruptcy Explained

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Bankruptcy law encompasses many different types of bankruptcy, for both businesses and individuals. Bankruptcy is a legal proceeding in which a person who cannot pay his or her bills can get a fresh financial start. The right to file bankruptcy is provided by federal law, and all bankruptcy cases are handled in Federal Court. Filing bankruptcy immediately stops all of your creditors from seeking to collect debts from you, at least until your debts are sorted out according to the law.

One of the reasons people file bankruptcy is to get a "discharge". A Discharge Order states that the person(s) filing the bankruptcy petition is no longer legally responsible to repay the debt. Pursuant to Federal Law, you must list all of your property and debts in your bankruptcy schedules, even if you want to keep the property or debt.


The purpose of a Chapter 7 bankruptcy is to discharge (or legally get rid of) debts which you can legally discharge. A Chapter 7 Trustee is appointed to monitor your case and determine if the value of your assets exceeds the allowable exemptions. Any property exceeding the state exemption levels will be sold by the Trustee with the proceeds being disbursed to your creditors. In most situations, unless you decide to reaffirm (keep) a debt, the debt is discharged at the completion of your bankruptcy. If you intend to keep items such as vehicles or your home, you must agree to reaffirm any loans secured by such items.


Chapter 13 is designed for individuals with regular income who are unable to meet their entire monthly debt obligation, but who are able to repay at least a portion of their debts over a period of time. Under a Chapter 13 you must file a Plan with the Court which will explain how, over a three to five year term, you will pay your secured debts, taxes, bankruptcy fees, and a certain percentage of unsecured debts.

Your Plan must be approved by the Court. Any unsecured debt remaining unpaid at the completion of your approved Plan is discharged. Chapter 13 plans are often used to save homes from foreclosure, cars from repossession sale, or reduce monthly payments to secured obligations.


This is similar to a Chapter 13, but it is only for family farmers.


This is mostly used by corporations. In Chapter 11, you may continue to operate your business, but your creditors and the Court must approve the Plan to repay your debts. There is no Trustee, unless the Judge decides that one is necessary. If a Trustee is appointed, the Trustee takes control of your business and property.