What is Bankruptcy Protection?

When an individual or business is unable to make payment to creditors to pay off their debts, they can file for bankruptcy protection under the bankruptcy laws of the United States. For an individual, bankruptcy protection may involve either a cancellation of most debts, along with the selling off of some of their assets, or a structured plan to pay down the debts that are owed. For a business, bankruptcy protection may either provide complete or partial relief of debts and contracts, assuming the business will remain in operation, or the business may cease operation and sell off its assets to pay debts.

There are two types of bankruptcy protection commonly used by individuals: Chapter Seven, and Chapter 13, where “chapter” refers to the chapter of the bankruptcy code that describes each one. In Chapter Seven, also called a “straight bankruptcy” or “liquidation”, a trustee is appointed to control the individual’s assets. The trustee then liquidates, or sells the assets, then gives the money to creditors in order to pay off debts, to the extent that this is possible. However, the individual is allowed to keep some personal property, depending on the laws of the state they live in.

Chapter 13, also called “wage-earner bankruptcy”, allows the individual to propose a plan to repay their debts interest-free over a three to five-year period, although the individual’s payment plan is subject to court approval. While in Chapter 13, an individual is protected from creditors collecting on debt or seizing assets to pay debts, and creditors are required to abide by the terms of the approved payment plan. Both types of personal bankruptcy make it very difficult for the individual to obtain credit for a period of seven to ten years after seeking bankruptcy protection.

Businesses may also seek bankruptcy protection under Chapter Seven, but also under Chapter 11, which consists of a reorganization, rather than a liquidation of assets. It may take anywhere from months or years for a business to emerge from this type of bankruptcy. As in Chapter 13, a business in Chapter 11 may propose a repayment plan for its debts within a certain time frame, after which it is up to the creditors to come up with a plan. If the business has stock that is traded on a public stock exchange, then the stock is no longer allowed to be traded publicly once bankruptcy protection is pursued. In some cases, this causes the value of the company’s stock to go to zero.

For businesses, and especially for individuals considering bankruptcy, it is highly advisable to retain the counsel of a bankruptcy attorney, due to the complexity of bankruptcy laws, which also vary slightly from state to state.

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Discuss this Article

Post 10

Thanks for all the advice. I could use some help with my personal bankruptcy and this is very useful.

Post 7

my husband filed chapter 13. he listed some debts that both our names are on. can the creditors come after me for payments.

Post 6

What happens to the promissory note on the mortgage?

Post 5

envelope1- I’m not a lawyer either, but I do work for one. First they will list all of your assets and debt, then take check your income and see if you are able to make your minimum payments on that debt. Finally they have this chart they compare those numbers to and depending on where you fall, that’s what they’ll suggest you file. If they can determine your income can support your expenses and a debt settlement plan, then you will have file chapter 13. I suggest you contact an attorney and seek council.

Post 4

My wife lost her job recently. We have medical bills piled high and not so good credit anyhow, so we are considering filing for bankruptcy. How do they determine which chapter you can file? Her unemployment and my disability are not very much to live on, especially with four kids. It would be such a relief to start fresh. As for chapter 13, if I could afford to pay off my debt in 3-5 years then I wouldn’t need to file bankruptcy.

Post 3

Yes, the courts look very close at all of your assets. They are going to want proof of where and how you spend money. When I filed I had to provide copies of my bank statements back three months. I even had to try and find receipts of where I spent my 2,000 tax refund earlier that year. And when I filed, my lawyer told me to have under $200 total in my bank accounts.

Post 2

SolarTower- I am not a lawyer, but went through the process not long ago. Like a lot of Americans I lost my job in the mortgage industry. I can tell you they are going leave you with as little as possible, including assets. We lost our toy hauler and the toys along with it. So if this truck is not needed, they may want the title if it’s proven valuable. Maybe the person who gave it to you can take back possession until the proceedings are over?

Post 1

My husband and I are currently going through bankruptcy process for chapter seven. We have not filed yet because we are concerned they may try and take away a personal item we have obtained recently. A family member gave my husband a fully-restored historic vehicle, making it his second truck. They are both valued at under 3k and I’m worried the courts may try and take it away from us. I’m afraid to mention it to our lawyers at this point.

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