The Truth About Filing Bankruptcy

Types

• Many individuals file under Chapter 7 of the U.S. Bankruptcy Code. Often called "liquidation" because the procedure eliminates most unsecured debts, debt secured by collateral remains in place. Debtors must pay alimony, student loans, child support and some taxes and municipal debts.
  
  Those who want to continue paying their obligations and keep certain assets file under Chapter 13, sometimes referred to as "re-organization." This form of bankruptcy gives them a chance to re-pay creditors under the protection of the courts according to a court-approved plan.
  
  Farmers file under Chapter 12 in order to reorganized their debts and continue their operations. Partnerships and corporations can also file under Chapter 7. Chapter 11 allows businesses to re-organize their finances, and continue business operations. Chapter 15 deals with bankruptcy cases that cross national borders.
  
  

Means Test

• Since 2005, debtors must pass a means test to qualify for a Chapter 7 bankruptcy filing. The means test compares the debtor's household income with the state's median income for the family size. If a debtor's income exceeds a certain threshold, he may be ineligible for a Chapter 7 filing.
  
  

Function

• The bankruptcy process starts with a filing of a voluntary petition and other finance-related documents in the U.S. Bankruptcy Court. An "automatic stay" prevents creditors from attempting to collect on the debts. Creditors cannot call or harass debtors. Nor can they impose repossessions, evictions, foreclosures, wage garnishments or other actions to collect on a debt. The court assigns a trustee to the case who takes over the debtor's estate. The trustee's responsibility includes selling excess assets beyond what the law allows a Chapter 7 debtors to keep and distributing the proceeds to the creditors. Trustees also assist the court in managing re-organizations plans filed by debtors.
  
  

Features

• The United States has 90 federal bankruptcy courts that are divided into districts. Each state has at least one federal bankruptcy court. A bankruptcy proceeding consists of predominantly procedural activities. The typical debtor has little, if any, contact with the bankruptcy judge. Most Chapter 7 debtors do not have to appear in court except when their creditors raise objections. There is a meeting of the creditors scheduled after filing of the bankruptcy petition. This meeting gives the trustee and creditors an opportunity to ask the debtor questions about his financial circumstances. Business and individuals debtors may have to meet with the judge to confirm the bankruptcy reorganization plans.
  
  

Time Frames

• Once a debtor files her bankruptcy protection petition, she is placed under the immediate protection of the bankruptcy court. The creditors meeting occurs 30 to 45 days after the case commences. Reorganization repayment plans typically cover three to five years. Most Chapter 7 debtors have their debt discharged 60 to 90 days after the creditors meeting takes place.
  
  

Effects

• When the bankruptcy court discharges debts in a bankruptcy case, a debtor no longer has responsibility for those obligations. The law prohibits creditors from any attempts to collect the debts.