Bankruptcy is a legal status whereby a person or business is dismissed from their debts. Bankruptcy is governed by federal laws, so an individual files for bankruptcy in a U.S. District Court, or more specifically, a U.S. Bankruptcy Court. Each case is assigned a Judge and a Trustee. Upon filing, the debtor must be careful to accurately list all their creditors. Creditors are notified of the filing and each has a right to respond and some creditors have a greater priority over others (for example, a mortgage company may have higher priority over a credit card company) when the payment plan is approved. Once a bankruptcy discharge is granted, creditors can no longer attempt to collect on their debts.
There are two types of bankruptcy an individual can file: Chapter 7 and Chapter 13. Upon filing of either bankruptcy, all creditors must stop any and all debt collection efforts.
Chapter 7 Bankruptcy
Under Chapter 7 Bankruptcy, the Trustee sells all debtor’s property and assets, including their home, and uses the proceeds to pay their creditors. Debtors are allowed to keep any monies leftover and any property they obtain after filing. A discharge under this chapter is usually granted quickly, generally about four months after the filing. In order for the court to approve a Chapter 7 Bankruptcy, certain laws apply, including the debtor’s yearly salary and the amount of debt they have accrued.
Chapter 13 Bankruptcy
Under Chapter 13 Bankruptcy, a debtor maintains all of their property and assets. With the approval of the court, the debtor agrees to a payment plan and makes all said payments to the Trustee, who then distributes the money to the creditors. This plan lasts until the debtor’s creditors are paid in full or until the end of a three to five year period, at which point the debtor receives a discharge. Chapter 13 Bankruptcy can be filed by most debtors. Essentially, they must have a regular income and must not have excessive debt.
These bankruptcies, however, do not provide protection from all debts. These unprotected debts include: alimony and child support, debts incurred after the bankruptcy is filed, some student loans, and fraudulent debts.
The laws can be complicated, difficult to interpret, and are always changing. There is also a multitude of paperwork to file, which can also be very complicated. So it is highly recommended that anyone considering filing for bankruptcy consult an experienced attorney.