Bankruptcy

The purpose of bankruptcy is to permit a person (or organization) to absolve their debts and acquire a fresh start while at the same time repaying creditors the largest amount possible by distributing the debtors finances and non-exempt assets. Bankruptcy legally discharges a business or person of their earlier debts regardless of whether they were entirely paid back, and also safeguards the debtor from being harassed by any further collection attempts on the debts.

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Ultimately, it's the equivalent of saying "I can't afford to pay off my debts - take everything I have, divide it up as best you can, stop pestering me, and let me start over again."

In the United States, bankruptcy is governed primarily under Federal jurisdiction through the Bankruptcy Code; located in Title 11 of the United States Code. State law does intervene at certain times, so while some generalizations can be made when it comes to the process - details may change from state-to-state. Regardless of where it is however, bankruptcy cases are always filed in United States Bankruptcy Court.

Bankruptcy Chapters:

There are 6 different kinds of bankruptcy under the United States Bankruptcy Code, but Chapters 7 and 13 are most frequently used for individuals.

Chapter 7
Chapter 7 is often referred to as "straight" or "liquidation" bankruptcy. Through a Chapter 7 a debtor will typically be required to turn over their assets to a trustee, which are then sold to raise funds that are used to repay present debts with creditors. What assets may be sold is different from state-to-state, certain 'necessities' such as a vehicle and primary home are frequently exempted, in addition to tools and equipment that to continue working after the fact.

When an individual files a petition for bankruptcy, what is known as a bankruptcy estate will be formed. The debtors assets (not including exemptions) are moved to this estate for liquidation. A trustee will be selected to represent this estate and determine the distribution to creditors who are owed, though the trustee will not represent either party particularly.

Typically it takes about three months after filing a Chapter 7 before what's usually referred to as a discharge is entered. This is a court order that forbids creditors from any additional collection attempts on non-secured debts that were owed on or before the initial Chapter 7 filing date.

Normal debts that are discharged include:

Not all debts can be included but nonetheless, notably what's owed to Uncle Sam and orders handed out by family courts. Debts that are usually not included for discharge include student loans, taxes, child and spousal support, government fines and penalties.

Chapter 13
Chapter 13 bankruptcy is the same as a government prepared debt management process for individuals. To qualify, a debtor is required to have secured debts totalling a sum not greater than $807,750 and unsecured debts lower than $269,750 - and Typically has to still be making money to make this an viable alternative to Chapter 7.

Under a Chapter 13 a person retains their assets instead of turning them over to an estate, but must give regular payments to a trustee, who hands out the money to owed creditors. These types of payment plans normally run from three to five years, with all outstanding debt discharged after that. Typically, a Chapter 13 will not be allowed if the creditors would otherwise receive more under a Chapter 7 arrangement.