Bankruptcy Information Center

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Bankruptcy - An Overview

Bankruptcy is a legal vehicle that provides relief to individuals and businesses in serious financial trouble and protects their creditors to the extent possible. Generally, the bankruptcy process assesses the debtor's assets and liabilities and provides a structure within which the debtor is allowed to keep some, and in most cases, all property and ordered to satisfy as many eligible debts as possible, according to an order of priority established by law. Remaining debts are discharged, except those of certain types, like domestic support orders, debt obtained by fraud and most tax debt.

The traditional stigma of bankruptcy has faded and been replaced by the view that it is a fresh start after a time of trouble. Most bankruptcy debtors have experienced unexpected and extreme financial shock, such as that caused by sudden events such as job loss, business failure, death, divorce or illness.

In such cases, filing bankruptcy may be the right answer. If you are facing serious financial challenges, an experienced bankruptcy attorney can help you assess your legal options.

Bankruptcy law is primarily federal and administered by the federal courts. However, the various states' consumer and commercial laws do play important roles in certain bankruptcy issues and some circumstances.

Bankruptcy is an available option for individual consumers, businesses, farmers and municipalities. There are two major bankruptcy types: liquidation and reorganization. For practical purposes, many debtors have so-called no-asset cases where all of the debtors' property is exempt from the liquidation requirement and eligible debt is discharged without any property being sold.

Chapter 7

Chapter 7 of the Bankruptcy Code governs liquidation bankruptcy, available to individuals and businesses. Upon the filing of a Chapter 7 bankruptcy petition, the bankruptcy court issues an "automatic stay" that stops most collection proceedings against the debtor. A bankruptcy trustee is responsible for gathering the debtor's nonexempt property, if any, liquidating it and distributing the proceeds to the creditors in order of legal preference. This process often leaves some creditors' debts unpaid when there are not enough assets to cover liabilities.

For an individual consumer debtor, these remaining debts are discharged and no longer the responsibility of the debtor; however, certain types of debt are nondischargeable and survive the bankruptcy, such as alimony or child support. For a business debtor, the liquidated business does not survive the bankruptcy.

Reorganization

A reorganization bankruptcy is more appropriate where there is ongoing income that can be used to pay creditors, at least in part. Reorganizations are governed by several chapters of the Bankruptcy Code. Chapter 11 generally controls reorganizations for individual debtors with high debts or for larger business entities. Chapter 13, on the other hand, generally covers individual consumer debtors with lower debts. Farmers can file for reorganization under Chapter 12 and municipalities under Chapter 9.

Filing for reorganization also generates an automatic stay of most collection activity. The debtor then develops a repayment plan to pay debts over a three- to five-year period through a bankruptcy trustee. At the successful conclusion of the payment plan, if certain conditions are met, remaining dischargeable debt is cancelled. If the debtor fails to make payments under the plan or fails to make alimony, child support or certain tax payments, however, the court may either dismiss the case or convert the reorganization to liquidation.

Involuntary bankruptcy

In addition to bankruptcies filed voluntarily by debtors, creditors have a legal remedy through "involuntary bankruptcy" petitions under Chapters 7 or 11. If either a minimum level of debt is present or a minimum number of creditors, creditors can file a bankruptcy petition against a debtor to ensure that assets are distributed fairly among creditors through the bankruptcy process. Creditors must take care only to file meritorious involuntary petitions, however. Penalties for filing improper involuntary petitions can be steep.

Speak to a bankruptcy lawyer

Bankruptcy law can benefit debtors and creditors alike, depending on the circumstances. If you feel that a bankruptcy proceeding may benefit you or your business, you should consult a skilled bankruptcy attorney to help determine your best course of action. If you feel that bankruptcy may be appropriate for your situation, schedule a consultation with a skilled bankruptcy attorney.

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Consumer Bankruptcy

When an individual falls desperately behind in his or her debt payments, one option may be to declare bankruptcy. Bankruptcy is a legal proceeding in a federal bankruptcy court that relieves the debtor of some or all of his or her debts. While bankruptcy may not be the best option for everyone, in the right situations, it can provide people with a fresh start. A lawyer experienced in bankruptcy law can advise you as to whether bankruptcy may be the right move for you.

Bankruptcy choices for consumers

Consumers, like businesses, have options in terms of which type of bankruptcy to pursue. These options are set forth in separate chapters of the federal bankruptcy law - called the Bankruptcy Code - and they are commonly referred to by their chapter numbers. Consumers most commonly file either under Chapter 7 or Chapter 13, with a very few filed under Chapter 11.

The 2005 changes to the federal bankruptcy laws created a new requirement that debtors receive credit counseling from an approved agency in the 180 days before filing for bankruptcy under any chapter, with some exceptions.

Most consumer bankruptcy cases are initiated voluntarily by consumers, but under certain circumstances, can arise involuntarily when creditors force debtors into bankruptcy.

Chapter 7

Chapter 7 bankruptcies, called "liquidation bankruptcies," are the most common type chosen by consumers. The Chapter 7 proceedings begin with the debtor's filing of a petition with the bankruptcy court, which triggers the automatic stay - bankruptcy terminology for the cessation of debt-collection activity. The court appoints a trustee who oversees the case and liquidates the debtor's nonexempt assets to pay off eligible debts to the extent possible.

Not all of the debtor's assets will be sold in a Chapter 7 bankruptcy case because the law specifies that certain property is exempt from liquidation. For many typical consumers, all of their property is exempt or already subject to valid liens, so eligible debts will be discharged without the loss of any property. This situation is commonly called a no-asset case.

Once the trustee has collected any nonexempt assets and paid creditors from the proceeds, any remaining unpaid debts are discharged, meaning that they no longer exist and the debtor has no further obligation to pay them. Some debts, however, are nondischargeable and remain valid, such as taxes, domestic support obligations and damages resulting from a debtor's willful or malicious acts.

Any remaining unpaid debts are discharged, meaning that they no longer exist and the debtor has no further obligation to pay them. Some debts, however, are nondischargeable and remain valid, such as taxes, domestic support obligations and damages resulting from a debtor's willful or malicious acts.

Chapter 13

Alternatively, a consumer may choose Chapter 13 if he or she has regular income, believes the crisis is temporary and wants to repay at least some debt. The debtor must have less than $383,175 in unsecured debt and $1,149,525 in secured debt to be eligible for Chapter 13. 11 U.S.C. § 109(e). A Chapter 13 proceeding, called a wage-earner plan, is also initiated by filing a petition and also stops creditors from trying to collect debts. The debtor proposes a debt repayment plan, to which creditors may object. If the court approves the plan, however, the creditors can take no action outside the plan's scope to collect their debts. Once the plan is completed, the debtor is entitled to a discharge, which releases him or her from all debts dealt with by the plan.

A comparison

Chapter 13 has certain advantages over Chapter 7 in consumer bankruptcies. For example, Chapter 13 allows the debtor to discharge more types of debts. Although many average consumers have only assets exempt from the liquidation requirement under Chapter 7, some may have assets eligible to be sold. For these consumers, Chapter 13 may allow them to retain more of their assets. A consumer's choice between Chapter 7 and Chapter 13 is not necessarily permanent; once proceedings have begun, a case may be converted to a different chapter under certain circumstances.

Speak to a bankruptcy lawyer

Sometimes consumers find themselves in such dire financial situations that filing for bankruptcy is their best option. Any decision to file for bankruptcy should be made carefully after consulting an experienced bankruptcy attorney. Contact a bankruptcy attorney today to learn more about your options to protect your financial well-being.

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Commercial BankCommercial Bankruptcy

Like a consumer, a business sometimes finds itself in the uncomfortable position of being unable to pay its debts. One solution is to file for bankruptcy, a legal process in federal bankruptcy court that releases the business from the obligation to pay all or some of its debts. A lawyer experienced in bankruptcy can advise business owners about whether bankruptcy is right for them.

Bankruptcy choices for small businesses

Businesses must choose among alternative types of bankruptcies, each of which corresponds to a different chapter of the federal Bankruptcy Code. Businesses usually choose either Chapter 7 or Chapter 11, or occasionally Chapter 13. Sometimes businesses can be involuntarily drawn into bankruptcy by their creditors, who face stiff financial penalties if they initiate an involuntary bankruptcy for invalid reasons.

Chapter 7 bankruptcy

Chapter 7 bankruptcies are called "liquidation bankruptcies." Chapter 7 is usually employed by consumer debtors, but can also be used by businesses that want to liquidate their assets to be relieved of debt. A Chapter 7 bankruptcy is commenced when the business files a petition with the bankruptcy court. The court then orders an automatic stay of debt collection activities against the business and its property. A court-appointed trustee manages the details of the bankruptcy, selling business assets to satisfy business debt, to the extent possible. At the conclusion of the proceeding, remaining debts of the business are not discharged as with an individual debtor, but generally the business ceases to exist because its assets are gone and it is no longer a profitable concern.

Chapter 11 bankruptcy

In Chapter 11 bankruptcies, which are usually filed by businesses and rarely by individuals, the commercial debtor is usually allowed to stay in business throughout the bankruptcy proceedings. A business debtor may only operate independently in its ordinary course; transactions outside the ordinary course of business require court approval.

A Chapter 11 proceeding, like one under Chapter 7, is initiated by filing a petition, but a trustee is not automatically appointed. Although the bankruptcy judge may decide to appoint a trustee in a Chapter 11 case, it is the exception rather than the rule. As in Chapter 7, the filing of the bankruptcy petition stops creditors from attempting to collect their debts.

The debtor has time to file a proposed plan of reorganization. The plan of reorganization sets forth in detail how the debtor intends to conduct its business, while continuing to make payments to its creditors. In some situations, creditors may instead or also propose plans of reorganization. Creditors are divided into classes with varying rights depending upon the types of debt they hold. The approval process involves negotiation and input from creditors. Ultimately, a plan must be approved by the court. In some cases, the court approves the plan even though some of the creditors did not. If no plan is approved, however, the bankruptcy is often converted to a Chapter 7 liquidation or may be dismissed.

The choice between Chapter 7 and Chapter 11 is not necessarily permanent; once proceedings have begun, a case may be converted to a different chapter, under certain circumstances.

Speak to a bankruptcy lawyer

Bankruptcy may not be the best option for every business, but sometimes it is the best choice a business owner can make. Alternatives to bankruptcy include working informally with creditors toward a repayment plan or assigning assets for the benefit of creditors. A lawyer experienced in bankruptcy law can advise a business about whether bankruptcy best meets its needs.

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Credit Counseling Requirement in Bankruptcy

In 2005, Congress passed and the president signed the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA), a bankruptcy reform law. One of the new requirements BAPCPA imposes on a bankruptcy debtor is to receive credit counseling from an approved credit counseling agency before the bankruptcy filing. A lawyer experienced in consumer credit and bankruptcy law can help educate debtors about the credit counseling requirements.

Credit counseling briefing

Specifically, a debtor must receive an "individual or group briefing" from a nonprofit budget and credit counseling agency within 180 days before filing for bankruptcy. The briefing can be in person, by telephone or via the Internet. The law provides that the briefing must "[outline] the opportunities for available credit counseling and [assist] such individual in performing a related budget analysis." If a debt management plan is developed in the course of the required counseling, it must be filed with the bankruptcy court.

Approved credit counseling agencies

In most states, the U.S. trustee maintains a list of approved credit counseling agencies for use in the court districts in those states. In Alabama and North Carolina, this list is approved by bankruptcy administrators. The list of approved agencies is available on the U.S. courts website. An approved agency is first on the list for a six-month probationary period, renewable in one-year increments. Approval can be revoked at any time. Interested persons can ask the court to review the approval of any agency.

To obtain approval, an agency must have qualified, experienced counselors who provide adequate counseling and have no financial interest in the counseling outcome; handle client funds securely; maintain an independent board of directors; charge reasonable and sliding scale fees; make certain disclosures; possess financial security to oversee repayment plans of clients; and maintain "quality, effectiveness, and financial security of the services it provides."

Exceptions to the credit counseling requirement

There are some exceptions to the counseling requirement for certain debtors in particular situations. First, the court may waive the counseling requirement if there are "exigent circumstances" and the debtor made a request for counseling that an agency was unable to provide within five days. Second, a debtor is excused from the requirement if incapacitated by mental illness or deficiency, if physically impaired such that he or she is unable to participate with reasonable effort or if on active military duty in a combat zone. Third, counseling is not required if the trustee or administrator in a particular court district determines there are not enough approved credit counseling agencies available.

Speak to a bankruptcy lawyer

Consumers considering bankruptcy as a future option should investigate the credit counseling requirement well before the anticipated bankruptcy filing. Experienced consumer and bankruptcy law attorneys can provide needed information about the counseling and about bankruptcy in general.

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Surviving the Emotional Effects of Bankruptcy

No matter what circumstances ultimately led to filing bankruptcy, both the practical and the emotional impact on the debtor will be enormous. Confronting the emotional and psychological issues surrounding bankruptcy and reaching an understanding and acceptance of the situation are essential to rebuilding and maintaining a successful financial life. An experienced bankruptcy attorney can guide a debtor through the complicated legal, financial and emotional maze of bankruptcy and steer him or her in the right direction for the future.

Filing bankruptcy can stir up negative emotions

Filing bankruptcy can, without a doubt, stir up many negative emotions. The debtor's sense of self-worth is often closely tied to his or her financial circumstances. Loss of money can be experienced as a loss of identity, self-esteem and confidence. We live in a society in which image is seemingly bought through possessions. Money can be viewed as a powerful currency not only in a purely economic sense, but also in relationships and thus a real or perceived loss of interpersonal power can ensue when bankruptcy is filed.

Understanding these emotions can help disentangle the practical realities of money from the possibly destructive or limiting emotional response to bankruptcy.

At times of significant loss, people tend to feel that their entire foundation has been shaken and that their most fundamental sense of security has been disrupted. They question their trust in themselves, in others and in the world at large. Although it may be natural for many to bury these frightening emotions, bringing core insecurities to a conscious level can actually reduce fear and the feeling of being out-of-control, which enables individuals to start tackling their situations constructively.

Speak to a bankruptcy lawyer

In addition, the counsel of a seasoned bankruptcy attorney can see a debtor through the tough times and guide him or her to a brighter financial future.

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Frequently Asked Questions About Bankruptcy

Q: Why are so many consumers filing bankruptcy?

A: Many Americans with excess debt have acquired their debts over long periods of time. While they intend to repay the debts, they may find themselves unable to do so because of unanticipated changes in circumstances such as medical emergencies, job losses or failed businesses, disability, divorce or loss of spouse. Any of these circumstances, combined with late fees, over limit fees and the extraordinarily high interest rates that creditors now charge can result in insurmountable debt.

Q: What alternative courses of action are there to filing bankruptcy?

A: Short of bankruptcy, a debtor may attempt to mediate with creditors or negotiate workout agreements to extend due dates, lower interest rates, partially forgive debt or alter other terms. A debtor may execute an assignment of property for the benefit of creditors (ABC), wherein the debtor puts assets in the trust of a neutral third party to pay creditors. A business debtor can sell the business, negotiating the satisfaction of debt as part of the deal. Other creative options to bankruptcy exist. Many debtors, however, find that their creditors are unwilling to agree to reasonable terms or are completely unwilling to negotiate.

Q: What types of bankruptcy are there?

A: Consumers usually file Chapter 7 "liquidation" or Chapter 13 "reorganization" bankruptcies. In practice, most persons considering Chapter 7 only own property exempt from liquidation under the law and most of their debt is cancelled (discharged) without actually losing any of their property. Under Chapter 13 bankruptcy, the debtor repays certain debts over time (from three to five years).

Q: Can bankruptcy free me from my student loans?

A: In some instances you can include student loans and taxes in a Chapter 13 repayment plan and pay them off over time. In many cases, this will save debtors money. Also, in rare instances, these debts may be dischargeable.

Q: Are spousal maintenance/alimony and child support obligations dischargeable in bankruptcy?

A: Domestic support obligations like alimony and child support are not dischargeable, nor does the filing of a bankruptcy petition stay most court proceedings dealing with family law issues. Under Chapter 7, but probably not under Chapter 13, other obligations to a spouse or child incurred in a divorce, separation or by court or government order are also not dischargeable, such as property settlement obligations.

Q: Can I stop paying my alimony and child support during my bankruptcy?

A: A debtor is required to remain current on all domestic support obligations such as alimony/spousal maintenance and child support throughout the duration of the bankruptcy. If a debtor falls behind on his or her domestic support obligations during bankruptcy, the bankruptcy could be dismissed or converted from a Chapter 13 to a Chapter 7 proceeding.

Q: How long may credit bureaus include bankruptcy information on a credit report?

A: Consumer credit reports may reveal Chapter 7 bankruptcy cases for 10 years from filing. Chapter 13 information can be included for seven years from discharge or 10 years from filing if there is no discharge. Account information for debts discharged under either chapter may be included in credit reports for seven years after the accounts go inactive.

Q: Should I consult a lawyer for legal advice about bankruptcy?

A: Yes. If you are contemplating bankruptcy or have questions about bankruptcy, you should contact a bankruptcy attorney immediately. As you will likely only file for bankruptcy once in your life, you should hire an experienced bankruptcy lawyer for this very important job.

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Bankruptcy Resource Links:


General information regarding consumer debt and bankruptcy, provided by the American Bankruptcy Institute:

Bankruptcy: An Overview : A bankruptcy overview from Cornell Law School, including links to state, federal and other sources.

Bankruptcy Courts
Links to U.S. Bankruptcy Court websites.

Official Bankruptcy Forms
From the Administrative Office of the U.S. Courts.

AnnualCreditReport.com

Official website where consumers can obtain free credit reports from the three national credit-reporting companies.

TransUnion

Credit reporting agency website features consumer information on credit reports, identity theft and fraud.

National Foundation for Credit Counseling (NFCC)

Features consumer credit and financial management advice.

Bankruptcy Information Sheet

General information about what happens in a bankruptcy case.

Overview of the United States Trustee Program

An overview of the United States Trustee Program.

Overview of Bankruptcy Chapters