About Bankruptcy

Bankruptcy laws help people who can no longer pay their creditors get a fresh start – by liquidating assets to pay their debts or by creating a repayment plan. Bankruptcy laws also protect troubled businesses and provide for orderly distributions to business creditors through reorganization or liquidation.

A bankruptcy case normally begins by the debtor filing a petition with the bankruptcy court. A petition may be filed by an individual, a married couple, or by a corporation or other entity. Creditors receive notice from the clerk of court that the debtor has filed a bankruptcy petition. Some bankruptcy cases are filed to allow a debtor to reorganize and establish a plan to repay creditors, while other cases involve liquidation of the debtor's property.

You can choose the kind of bankruptcy that best meets your needs (provided you meet certain qualifications):

Chapter 7 of the Bankruptcy Code provides for the “liquidation” or sale of a debtor’s nonexempt property and the distribution of the proceeds to creditors. It is also commonly known as the “fresh start” type bankruptcy. In the case of an individual, the debtor is allowed to claim certain property as exempt. In exchange for this, the debtor gets a discharge, which means that the debtor does not have to pay certain types of debts. Corporations and partnerships do not receive discharges.

Chapter 13, also known as a “wage earner’s plan,” enables individuals with regular income to develop a plan to repay all or part of their debts over a three to five year period. Payments are made to a chapter 13 standing trustee, who makes distributions to creditors according to the provisions of a confirmed plan.  Filing a chapter 13 case allows debtors to keep valuable property – especially a home and car – which might otherwise be lost to foreclosure or repossession, if the debtor can make the payments which the bankruptcy law requires to be made to creditors. 

Chapter 11, usually filed by businesses, but occasionally are utilized by individuals with significant assets. While the debtor maintains control of the day-to-day operations of the business or the individual’s estate, the creditors and the court work to approve a plan to repay the debts. There is no trustee unless the judge decides that one is necessary; if a trustee is appointed, the trustee takes control of the business and/or property.

Chapter 12 – Like chapter 13, but it is only for family farmers and family fishermen.

For additional information on all chapters, please visit the U.S. Courts website:  Bankruptcy Basics