Bankruptcy Law

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: 

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:

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:

While bankruptcy can provide financial relief, the process has several downsides. One of the biggest is the impact on the debtor’s credit.

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.