Bankruptcy is a legal proceeding involving a person or business that is unable to repay outstanding debts. The bankruptcy process begins with a petition filed by the debtor, which is most common. Bankruptcy Basics is a publication of the Administrative Office of the U.S. Courts. It provides basic information to debtors, creditors, court personnel, the media, and the general public on different aspects of federal bankruptcy laws. If you are thinking about bankruptcy, these articles will help you decide if it's right for you. Learn what bankruptcy is, what bankruptcy can and cannot do, the difference between Chapter 7 and Chapter 13 bankruptcy, alternatives to bankruptcy, and more.
A discharge releases individual debtors from personal liability for most debts and prevents the creditors owed those debts from taking any collection actions against the debtor. Because a chapter 7 discharge is subject to many exceptions, debtors should consult competent legal counsel before filing to discuss the scope of the discharge.
Generally, excluding cases that are dismissed or converted, individual debtors receive a discharge in more than 99 percent of chapter 7 cases. In most cases, unless a party in interest files a complaint objecting to the discharge or a motion to extend the time to object, the bankruptcy court will issue a discharge order relatively early in the case — generally, 60 to 90 days after the date first set for the meeting of creditors.
The grounds for denying an individual debtor a discharge in a chapter 7 case are narrow and are construed against the moving party. Among other reasons, the court may deny the debtor a discharge if it finds that the debtor: failed to keep or produce adequate books or financial records; failed to explain satisfactorily any loss of assets; committed a bankruptcy crime such as perjury; failed to obey a lawful order of the bankruptcy court; fraudulently transferred, concealed, or destroyed property that would have become property of the estate; or failed to complete an approved instructional course concerning financial management.
Secured creditors may retain some rights to seize property securing an underlying debt even after a discharge is granted. Depending on individual circumstances, if a debtor wishes to keep certain secured property such as an automobile , he or she may decide to "reaffirm" the debt.
A reaffirmation is an agreement between the debtor and the creditor that the debtor will remain liable and will pay all or a portion of the money owed, even though the debt would otherwise be discharged in the bankruptcy. In return, the creditor promises that it will not repossess or take back the automobile or other property so long as the debtor continues to pay the debt.
If the debtor decides to reaffirm a debt, he or she must do so before the discharge is entered. The debtor must sign a written reaffirmation agreement and file it with the court. The Bankruptcy Code requires that reaffirmation agreements contain an extensive set of disclosures described in 11 U.
Among other things, the disclosures must advise the debtor of the amount of the debt being reaffirmed and how it is calculated and that reaffirmation means that the debtor's personal liability for that debt will not be discharged in the bankruptcy.
The disclosures also require the debtor to sign and file a statement of his or her current income and expenses which shows that the balance of income paying expenses is sufficient to pay the reaffirmed debt. If the balance is not enough to pay the debt to be reaffirmed, there is a presumption of undue hardship, and the court may decide not to approve the reaffirmation agreement. Unless the debtor is represented by an attorney, the bankruptcy judge must approve the reaffirmation agreement.
If the debtor was represented by an attorney in connection with the reaffirmation agreement, the attorney must certify in writing that he or she advised the debtor of the legal effect and consequences of the agreement, including a default under the agreement.
The attorney must also certify that the debtor was fully informed and voluntarily made the agreement and that reaffirmation of the debt will not create an undue hardship for the debtor or the debtor's dependants.
The Bankruptcy Code requires a reaffirmation hearing if the debtor has not been represented by an attorney during the negotiating of the agreement, or if the court disapproves the reaffirmation agreement.
The debtor may repay any debt voluntarily, however, whether or not a reaffirmation agreement exists. An individual receives a discharge for most of his or her debts in a chapter 7 bankruptcy case. A creditor may no longer initiate or continue any legal or other action against the debtor to collect a discharged debt. But not all of an individual's debts are discharged in chapter 7. Debts not discharged include debts for alimony and child support, certain taxes, debts for certain educational benefit overpayments or loans made or guaranteed by a governmental unit, debts for willful and malicious injury by the debtor to another entity or to the property of another entity, debts for death or personal injury caused by the debtor's operation of a motor vehicle while the debtor was intoxicated from alcohol or other substances, and debts for certain criminal restitution orders.
The debtor will continue to be liable for these types of debts to the extent that they are not paid in the chapter 7 case. Debts for money or property obtained by false pretenses, debts for fraud or defalcation while acting in a fiduciary capacity, and debts for willful and malicious injury by the debtor to another entity or to the property of another entity will be discharged unless a creditor timely files and prevails in an action to have such debts declared nondischargeable.
The court may revoke a chapter 7 discharge on the request of the trustee, a creditor, or the U. Main content Chapter 7 - Bankruptcy Basics This chapter of the Bankruptcy Code provides for "liquidation" - the sale of a debtor's nonexempt property and the distribution of the proceeds to creditors. Alternatives to Chapter 7 Debtors should be aware that there are several alternatives to chapter 7 relief. Background A chapter 7 bankruptcy case does not involve the filing of a plan of repayment as in chapter Chapter 7 Eligibility To qualify for relief under chapter 7 of the Bankruptcy Code, the debtor may be an individual, a partnership, or a corporation or other business entity.
How Chapter 7 Works A chapter 7 case begins with the debtor filing a petition with the bankruptcy court serving the area where the individual lives or where the business debtor is organized or has its principal place of business or principal assets. In order to complete the Official Bankruptcy Forms that make up the petition, statement of financial affairs, and schedules, the debtor must provide the following information: A list of all creditors and the amount and nature of their claims; The source, amount, and frequency of the debtor's income; A list of all of the debtor's property; and A detailed list of the debtor's monthly living expenses, i.
Role of the Case Trustee When a chapter 7 petition is filed, the U. The Chapter 7 Discharge A discharge releases individual debtors from personal liability for most debts and prevents the creditors owed those debts from taking any collection actions against the debtor.
Notes The "current monthly income" received by the debtor is a defined term in the Bankruptcy Code and means the average monthly income received over the six calendar months before commencement of the bankruptcy case, including regular contributions to household expenses from nondebtors and including income from the debtor's spouse if the petition is a joint petition, but not including social security income or certain payments made because the debtor is the victim of certain crimes.
To determine whether a presumption of abuse arises, all individual debtors with primarily consumer debts who file a chapter 7 case must complete Official Bankruptcy Form B22A, entitled "Statement of Current Monthly Income and Means Test Calculation - For Use in Chapter 7. An involuntary chapter 7 case may be commenced under certain circumstances by a petition filed by creditors holding claims against the debtor.
Each debtor in a joint case both husband and wife can claim exemptions under the federal bankruptcy laws. In North Carolina and Alabama, bankruptcy administrators perform similar functions that U. These duties include establishing a panel of private trustees to serve as trustees in chapter 7 cases and supervising the administration of cases and trustees in cases under chapters 7, 11, 12, and 13 of the Bankruptcy Code.
The bankruptcy administrator program is administered by the Administrative Office of the United States Courts, while the U. For purposes of this publication, references to U. A fee is charged for converting, on request of the debtor, a case under chapter 7 to a case under chapter You sold stuff to make payments.
Bankruptcy is confusing, not to mention emotionally devastating. Here are some things you need to know before you take the first step. Related: If you need help right now, contact one of our financial coaches. The judge and court trustee examine your assets and liabilities to decide whether to discharge those debts.
If the court finds that you really have no means to pay back your debt, you declare bankruptcy. Bankruptcy can stop foreclosure on your home, repossession of property, or garnishment of your wages.
Bankruptcy cancels many—not all—of your debts. When you file for bankruptcy, creditors have to stop any effort to collect money from you, at least temporarily. However, even if you declare bankruptcy, the courts can require you to pay back certain debts. Each bankruptcy case is unique, and only a court can decide the details of your own bankruptcy.
There are two main types of bankruptcy for consumers. Chapter 13 means the court approves a plan for you to repay some or all of your debts over three to five years. You agree to a monthly payment plan and must follow a strict budget monitored by the court. This kind of bankruptcy stays on your credit report for seven years.
Related: Dave explains where a Chapter 13 bankruptcy falls in the Baby Steps. Chapter 7 means the court sells all your assets—with some exemptions—so you can pay back as much debt as possible. The remaining unpaid debt is erased.
You can only file Chapter 7 bankruptcy if the court decides your income is too low to pay back your debt. This type of bankruptcy stays on your credit report for 10 years. Related: Dave explains the difference between Chapter 7 and Chapter 13 bankruptcy. You may also hear of Chapter 12 bankruptcy, which is for farmers and fishermen.
For specific information about bankruptcy laws in your area, visit the United States Courts website. There is a bankruptcy court for each judicial district in the United States—90 districts in all. Administration over bankruptcy cases is often handled by a trustee , an officer appointed by the United States Trustee Program of the Department of Justice, to represent the debtor's estate in the proceeding.
There is usually very little direct contact between the debtor and the judge unless there is some objection made in the case by a creditor. Bankruptcy filings in the United States fall under one of several chapters of the Bankruptcy Code, including Chapter 7 , which involves the liquidation of assets; Chapter 11 , which deals with company or individual reorganizations ; and Chapter 13 , which arranges for debt repayment with lowered debt covenants or specific payment plans.
Bankruptcy filing costs vary, depending on the type of bankruptcy, the complexity of the case, and other factors. Individuals—and in some cases businesses, with few or no assets—typically file Chapter 7 bankruptcy. It allows them to dispose of their unsecured debts , such as credit card balances and medical bills.
A person filing Chapter 7 bankruptcy is basically selling off their assets to clear their debt. People who have no valuable assets and only exempt property—such as household goods, clothing, tools for their trades, and a personal vehicle worth up to a certain value—may end up repaying no part of their unsecured debt.
Businesses often file Chapter 11 bankruptcy, the goal of which is to reorganize, remain in business, and once again become profitable. Filing Chapter 11 bankruptcy allows a company to create plans for profitability, cut costs, and find new ways to increase revenue. Their preferred stockholders , if any, may still receive payments, though common stockholders will not. For example, a housekeeping business filing Chapter 11 bankruptcy might increase its rates slightly and offer more services to become profitable.
Chapter 11 bankruptcy allows the business to continue conducting its business activities without interruption while working on a debt repayment plan under the court's supervision. In rare cases, individuals can also file Chapter 11 bankruptcy.
Individuals who make too much money to qualify for Chapter 7 bankruptcy may file under Chapter 13 , also known as a wage earner's plan. It allows individuals—as well as businesses, with consistent income—to create workable debt repayment plans. The repayment plans are commonly in installments over the course of a three- to five-year period. In exchange for repaying their creditors, the courts allow these debtors to keep all of their property, including otherwise nonexempt property.
While Chapter 7, Chapter 11, and Chapter 13 are the most common bankruptcy proceedings, especially as far as individuals are concerned, the law also provides for several other types:. When a debtor receives a discharge order, they are no longer legally required to pay the debts specified in the order. However, not all debts qualify to be discharged.
Some of these include tax claims, anything that was not listed by the debtor, child support or alimony payments, personal injury debts, and debts to the government. In addition, any secured creditor can still enforce a lien against property owned by the debtor, provided that the lien is still valid. Debtors do not necessarily have the right to a discharge. When a petition for bankruptcy has been filed in court, creditors receive a notice and can object if they choose to do so.