Bankruptcy law is a legal process that helps individuals, businesses, and organizations when they are unable to pay off their debts. Bankruptcy offers a legal framework for debtors to obtain financial relief by either restructuring their debts or discharging them altogether.
Bankruptcy law provides a fresh start for those facing overwhelming financial difficulties. This legal guide offers the basics of bankruptcy law, including defining key terms and explaining how the process works.
What is bankruptcy law? An individual or business that is in unmanageable debt can declare bankruptcy as a way to help manage that debt. Federal law guarantees the right to declare bankruptcy. Only federal courts have jurisdiction over bankruptcy matters. Bankruptcy law is the legal process for dealing with the debt issues.
There are several terms for debtors to know in bankruptcy law. Some of the most important indicate the type of bankruptcy a person files, specifically the chapter that the person uses for his or her bankruptcy. Bankruptcies are called chapters because of the associated chapter in the federal Bankruptcy Code. Some of the most common terms to know include:
Chapter 7 — Chapter 7 is liquidating or selling assets to pay as many debts as possible. This method frees the debtor from all unsecured debt and does not include a payment plan.
Chapter 13 — Chapter 13 is reorganizing debts or establishing a payment plan for paying all or some debts over three to five years. The court appoints a person to distribute the money to the creditors.
Debt — Debt is the amount owed to creditors.
Creditors — Creditors are the lenders, those who have provided any type of loan that the debtor owes.
Plan — A plan is what the debtor presents to the court outlining the proposed process for repaying the debt. An experienced attorney from a bankruptcy law firm may be able to guide the debtor through developing this plan.
Assets — Assets are properties that the debtor owns.
There are three categories of claims or debts covered by bankruptcy laws, which are often handled by bankruptcy law firms for businesses that are in debt:
Secured debt — These debts include mortgages, auto loans, and other loans backed by collateral, usually, a house or car or other valuable item. After completing the process according to bankruptcy law, the individual or business can be “discharged” from these debts.
Priority unsecured debt — These debts have priority payment under governmental policy. They include food stamps and pensions.
Unsecured debt — In chapter 13, creditors of unsecured loans, such as credit cards, are the last to collect. What is left, if anything, is distributed to these creditors. Bankruptcy protects the debtor by “discharging” or removing the remaining debts.
If you are facing bankruptcy, consider consulting with a bankruptcy law firm to find an attorney experienced in bankruptcy law who can provide legal aid during the process. Be sure to choose one who suits your needs and uses your preferred method of communication.
Bankruptcy law includes a legal process. A debtor must submit a petition to the court to get started. Hiring an attorney from a bankruptcy law firm can help with this petition because experienced lawyers already understand the requirements.
Federal law governs nearly all bankruptcy cases, although states are free to enact rules to cover topics not covered by federal law. Across the country, special bankruptcy courts handle only debtor-creditor cases. The petition must be submitted to the United States Bankruptcy Court for bankruptcy law claims.
Filing a chapter 7 of bankruptcy law costs $338, and filing a chapter 13 costs $313 for either an individual or a business. The court may allow a debtor to pay the filing fee in installments if he or she cannot pay it up front. If a debtor’s income is at or below 150 percent of the poverty level, the chapter 7 filing fee may be waived. Once the court approves the petition, a trustee is appointed to oversee the case.
Bankruptcy filings are grouped according to which chapter of the federal Bankruptcy laws applies. Chapter 8 relates to asset liquidations. Chapter 10 concerns individual or company reorganizations. Chapter 13 deals with debt repayment under lower debt covenants or specific payment options. Bankruptcy filing costs can vary according to several factors, including the chapter.
This technique can be used if a company is financially insolvent. Closing a business through a process called “liquidation” lets a project end in an organized way while respecting the rights of its workers and creditors.
The goal is to sell the debtor’s assets quickly and efficiently to pay those the debtor owes (e.g., employees, suppliers, and others). The assets can be liquidated for a maximum of 12 months.
Chapter 13 is a reorganization bankruptcy. It permits debtors to retain ownership of their property by agreeing to make monthly payments against their debt for three to five years.
Chapter 13 of the bankruptcy law offers a lot of benefits besides letting debtors keep their property. An automobile loan, for example, can be restructured to decrease the principal balance to the market value of the collateral and extend the payback period to 60 months, which lowers the monthly payments. Mortgages, some school loans, and tax debts are just a few other debts that can be altered in a chapter 13 bankruptcy.
Chapter 11 of the bankruptcy law is a type of bankruptcy available to large businesses and corporations and to individuals who have significant debts. Chapter 11 allows debtors to reorganize their finances, restructure their debts, and continue operating their businesses while they repay their creditors.
Businesses that have gone bankrupt but wish to continue operating may file for chapter 11 bankruptcy protection. Like a personal reorganization, chapter 11 shelters corporations from creditors while they work out a repayment plan. The properties of the business can be reorganized to provide the company with a second opportunity at profitability.
Chapter 12 is for “family farmers” or “family fishermen” with a “regular annual income.” This type of bankruptcy enables financially challenged family farmers to create and implement a repayment plan for all or part of their obligations. Under chapter 12, debtors propose a repayment plan to make installments to creditors over three to five years. Payments must be spread over three years unless the court grants an extended period “for cause.” However, unless the plan seeks to pay 100 percent of domestic support claims (i.e., child support and alimony), it must last five years and contain all the debtor’s disposable income. In no circumstance may a plan provide for payments over five years.
Chapter 15 allows foreign creditors to participate in U.S. bankruptcy proceedings and bans discrimination against foreign creditors (save for some foreign government and tax rights).
The protection from a municipality’s creditors provided by chapter 9 is meant to be only temporary. This is provided so the municipality can plan and negotiate a strategy for reorganizing its debts when it receives protection from its creditors under chapter 9.
If everything proceeds according to plan with a bankruptcy, the court’s final action is to grant a discharge, which absolves the debtor of all eligible debts. The discharge order forbids creditors from taking any further action to pursue a discharged obligation.
The court may refuse a discharge in extremely limited circumstances. These include when a debtor attempts to deceive a creditor by concealing property, providing false information to the court, failing to comply with an order from the court, and others.
Bankruptcy has both pros and cons for the debtor. The pros of bankruptcy can include the following:
Some of the drawbacks to filing for bankruptcy include the following:
Before deciding to file for bankruptcy, a debtor may want to consider one or more of the following alternatives:
Avoid bankruptcy by paying off or settling debts.
Reduce regular expenses, earn more money, negotiate a better loan rate, or sell property to make debt payments.
Contact a bankruptcy law firm to discuss additional legal options. A bankruptcy lawyer can provide more information on other options that may be available.
Take advantage of credit counseling services. These can aid debtors in creating a budget, negotiating a repayment schedule with low or even no interest, and ending aggressive collection tactics from creditors.
While bankruptcy can provide financial relief, the process has several downsides. One of the biggest is the impact on the debtor’s credit.
Bankruptcy stays on a person’s credit report for up to 10 years, making it difficult to obtain credit in the future. Some employers and landlords may view a bankruptcy filing as a negative mark on a person’s financial history and be less inclined to hire or rent to the person.
Another downside to filing for bankruptcy is the potential loss of assets. In chapter 7 bankruptcy, certain assets — homes, cars, and other property — may be liquidated to pay off debts. While chapter 13 bankruptcy allows individuals to restructure their debts and pay them off over time, it may still require the sale of some assets to pay off creditors.
Bankruptcy may be a good choice if a person has excess debt and has no other options. Filing for bankruptcy can eliminate or reduce debts, stop creditor harassment, and give the debtor a fresh financial start.
However, bankruptcy is not a decision to be taken lightly because it has serious long-term consequences. Bankruptcy can negatively impact a person’s credit score, making it difficult to obtain credit in the future and affecting the person’s ability to get certain jobs or rent an apartment. It’s important to consider all options before deciding if bankruptcy is the best choice. Consulting with bankruptcy law firms may also help.
Unsecured debts — credit cards and personal loans — are sometimes dischargeable in bankruptcy. However, bankruptcy laws won’t wipe out certain other debts, including student loans.
When you declare bankruptcy, you may not necessarily lose your car. If part of your debt is a car loan, you generally may choose to surrender the car to the lender or continue making payments.
If you choose to keep the car, you can reaffirm the debt. Reaffirming means agreeing to continue making payments on the loan. Another option is to redeem the car by paying the vehicle’s current value to the lender. If a debtor owns a car outright, he or she can keep the car if it is within the state’s allowed exemption limit.
Typically, a bankruptcy proceeding begins when the debtor submits a petition to the bankruptcy court. An individual, a married couple, a corporation, or another legal entity can file a petition for bankruptcy.
Federal bankruptcy law governs all bankruptcy proceedings. Bankruptcy rules, known as the federal rules of bankruptcy procedure, and the local laws of the bankruptcy court in each state govern the bankruptcy process.
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Yes, you can file for bankruptcy in your local bankruptcy court. There are bankruptcy courts in all states. Locate the court in your state and file your petition for bankruptcy. For more information, visit your state’s bankruptcy website or contact bankruptcy law firms.
The first step to filing for bankruptcy for some may be to consult with lawyers from bankruptcy law firms. The attorney can offer guidance in determining if bankruptcy is the best option. Individuals and businesses can generally file under two types of bankruptcy: chapter 7 and chapter 13. After determining the chapter to file under, the debtor will file a petition with the court, often with the help of an attorney.
A debtor petitions the bankruptcy court. This can often be done with the help of a lawyer from a bankruptcy law firm who specializes in these types of cases.
To file for chapter 13 bankruptcy, an individual must have a regular income and have debts that fall within the eligibility limits. As of 2023, individuals cannot have more than $419,275 in unsecured debt or $1,257,850 in secured debt to be eligible for chapter 13 bankruptcy.
Businesses that wish to file for bankruptcy must also meet specific eligibility requirements. These requirements vary depending on the type of bankruptcy being filed.
When filing for bankruptcy, you’ll need to submit a petition to the court. The petition is a legal document that provides information about a debtor’s financial situation, assets, liabilities, and income. The petition must be completed accurately and truthfully. Providing false information can result in serious consequences.
Attorneys from bankruptcy law firms must include the following information in a bankruptcy petition: