Filing For Bankruptcy

The main point of bankruptcy is to allow an individual to absolve their debts and acquire a fresh start while at the same time paying off creditors the largest amount possible. Bankruptcy legally forgives a person or business of included debts even if none of the debts were not paid off in full, and also shields the debtor from being given a hard time by any additional collection attempts on the debts.

In the United States bankruptcy is mostly handled federally through the Bankruptcy Code, under Title 11 of the United States Code. State law can be a factor as well, so while some generalizations can be made regarding the process - details might vary from state-to-state. Bankruptcy claims are all filed with the United States Bankruptcy Court.

There are 6 chapters of bankruptcy in the United States Bankruptcy Code, but Chapters 7 and 13 are the particular chapters used for individuals.

Chapter 7 Bankruptcy

Chapter 7 is often referred to as liquidation bankruptcy. With Chapter 7, a debtor will usually have to turn over their assets to a trustee, which are then liquidated to pay down current debts with creditors. What assets are allowed to be liquidated differs from state to state. Certain necessities like a vehicle and home are often exempt, as well as tools and equipment needed to work afterwards.

When a person files a petition for bankruptcy, what is known as a "bankruptcy estate" will be formed. The debtors assets (without exemptions) are moved to this estate for liquidation. A trustee is appointed to represent this estate and make decisions on distribution to creditors owed, though the trustee does not represent either party exclusively.

About 90 days after filing a Chapter 7, the debtor will enter a phase called discharge. That is a court order that prevents creditors from any more collection attempts on debts that were owed on or before the original Chapter 7 filing date.

Common debts that are discharged are:

Credit card balances
Medical debts
Personal loans
Contract breaches or financial negligence

Not all debts can be included - especially federal taxes and family court orders.

Chapter 13 Bankruptcy

To qualify for a Chapter 13, a debtor must no have more then $807,750 in secured debt, and less than $270,000 in unsecured debt. In most cases the debtor must also be earning a reasonable income to make this an viable alternative to Chapter 7.

Under a Chapter 13 an individual retains their assets as opposed to giving them over to an estate; but must submit regular payments to a trustee who will distribute the money to owed creditors (like a debt management program). These payments normally stretch out over three to five years, with any left over debt discharged after that. Most courts will not permit a Chapter 13 if the creditors would otherwise receive more under a Chapter 7 arrangement.