Bankruptcy

Consumer Bankruptcies (Chapter 7 and 13 Bankruptcies)

Business/Corporate Bankruptcies (Chapter 11 Bankruptcies)

WHAT IS BANKRUPTCY?

Bankruptcy is a right provided by law to people who are deeply in debt and allows them a chance at a fresh start. It is a legal proceeding brought by a Debtor (one who owes payment to another) seeking relief provided under a federal statute, the Bankruptcy Code ("Code").

For individuals there are two types of relief under the Code.

(1) The first is liquidation under Chapter 7 of the Code. In a liquidation case, all of the debtor’s nonexempt assets are converted into cash and distributed to creditors according to the Code. However, the law allows the debtor to keep some money and most types of personal property in Bankruptcy. At the end of the proceeding, the debtor receives a discharge of most of his debts. This discharge absolves the debtor from any responsibility to pay for most of these debts, as well as gives the debtor certain other protections.

(2) The second type of relief is a reorganization of the debtor’s financial affairs by means of a Chapter 11 or Chapter 13. In the case of a Chapter 13, the debtor will propose a plan for payment of some or all of his debts within the guidelines provided by the Code. This plan permits the debtor to keep most of their property by repaying the creditors out of their future income. Debtor receives a discharge after he completes the repayment under the plan. Chapter 13 is only available to people with regular income.

Chapter 11 is the reorganization chapter most commonly used by businesses, but it is also available to individuals. Creditors vote on whether to accept or reject the repayment plan and this plan also needs to be approved by the court. The debtor is usually allowed to remain in control of his assets and continue to run his business, but the court may also appoint a Trustee to take possession and control of the business.

EFFECTS OF A DISCHARGE

The fact that an individual filed for Bankruptcy can appear on his credit report for as long as 10 years. Also after getting a discharge under the Code the person cannot file for another Bankruptcy for another 6 years. Filing for Bankruptcy does not affect any of the debts incurred by the person after the filing.