Personal Bankruptcy

Bankruptcy allows debtors who are unable to pay all outstanding debts to rid themselves of these debts and obtain a fresh start.  

As stated by the US Supreme Court, bankruptcy gives "the honest but unfortunate debtor … a new opportunity in life and a clear field for the future, unhampered by the pressure and discouragement of preexisting debt." (Local Loan Co. v. Hunt, 292 U.S. 234, 244 (1934)).

Bankruptcy should be considered a last resort since it adversely affects your credit. Some people rush to file bankruptcy when they become stressed by the creditor harassment that arises out of minor debts. In most cases, creditors and collection agencies will not file a lawsuit against you to collect minor debts since doing so is costly. There are better ways to stop this type of harassment than filing bankruptcy. 

Good reasons to file for bankruptcy include multiple wage garnishments, a creditors' threat to repossess property that is important to you, or to delay a foreclosure. 

In general, bankruptcy law is complex and can be confusing. It is a good idea to consult a bankruptcy lawyer about your particular circumstances. For more information, we recommend reading further in our blog When Should I File for Business Bankruptcy?

There are six different types of bankruptcy, each known by the chapter in the Bankruptcy Code in which it is located. Although they differ in form and procedure, they all provide for permanent relief from certain debts. In bankruptcy terms, the debtor's dischargeable debts are discharged. Most debtors file for bankruptcy under Chapters 7, 11, and 13. 

• Chapter 7 - Provides for liquidation of the debtor's non-exempt assets. Certain assets, such as a home or car, may be exempt from bankruptcy. A court-appointed trustee conducts the sale of the debtor's non-exempt assets and distributes the proceeds to creditors. Both individuals and businesses may file for bankruptcy under Chapter 7. 
• Chapter 9 - Provides for the reorganization of municipalities (which includes cities, towns, villages, taxing districts, municipal utilities, and school districts). 
• Chapter 11 - Usually relied upon by partnerships and corporations. It provides for a supervised reorganization of a business and allows the debtor to maintain the business while implementing a payment plan confirmed by the court.
• Chapter 11, Subchapter 5 offers small businesses a more cost-effective way to reorganize.
• Chapter 12 - Contains bankruptcy provisions applicable to family farmers and fisherman. 
• Chapter 13 - Provides for bankruptcy of an individual with a regular income which is used to make a payment plan to pay debts, usually within three to five years.
• Chapter 15 - Applies to cross-border bankruptcies. It adopts and implements the United Nations' Model Law on Cross Border Insolvency.

Chapter 11 allows a business to restructure its business organization in order to continue operation while repaying its debts through a structured plan. This process is much more complex than the Chapter 13 repayment plans used in personal bankruptcy, and the creditors of the business must accept the terms of the process before it will be approved. If your business debts are small enough, the company may be able to be classified as a “small business debtor” and file under subchapter 5, which greatly expedites the process.

Chapter 5 bankruptcy is actually a subchapter of Chapter 11 bankruptcy that offers a more cost-effective option for small businesses with debts under $2,725,625 to reorganize.

Read all about this type of bankruptcy in our article Understanding Subchapter 5 Business Bankruptcy.

The goal of both Chapter 7 and Chapter 13 personal bankruptcy is a total discharge of debts. The main differences are the eligibility requirements, the length of time the bankruptcy takes, whether prepayment of debts is required, and how much of your property you can keep.  

In Chapter 7 bankruptcy you don’t need to repay your debts whereas in Chapter 13 bankruptcy you must repay all or a portion of your debts. 

Repaying your debts in Chapter 13 occurs over a 3-5 year period and you must have income sufficient to make full timely payments. You receive a discharge only after you complete your plan. Generally, you will not lose your property in a Chapter 13 bankruptcy as long as you account for repayment of any amount you are behind  as well as payments that come due during the plan. 

In contrast, in Chapter 7 bankruptcy, a trustee can take the property you owe that is not exempt from collection to sell it and distribute the proceeds to your creditors so that they are repaid as much as possible. Typically you are able to keep some or all of the equity in your home, car, and personal property. Only those who pass a "means test" can file Chapter 7 bankruptcy. Assuming you pass the means test and include all your debts in your paperwork, your debts are likely to be discharged within 4-6 months.

While there is no minimum amount of debt to qualify for bankruptcy, certain debt limits do apply to Chapter 13 bankruptcy. The maximum amount currently is $1,149,525 in secured debt (such as a mortgage) and $383,175 in unsecured debt, but it does change periodically.  

There are limits on how many times you can discharge your debts in bankruptcy, so if your debt amount is relatively low, it may be a good idea to consider alternatives to bankruptcy now so that filing for bankruptcy remains an option for you in the future.

Filing bankruptcy without a lawyer (or "pro se") is possible. However, the rules and procedures governing the bankruptcy discharge process are extremely complex, and therefore it can be very beneficial to hire an experienced bankruptcy attorney to avoid complications. 

Debtors who file bankruptcy pro se are responsible for knowing how the relevant bankruptcy laws and local court procedures apply to them. He/she must also fulfill any credit counseling obligations before filing your case. Failure to comply with these or any other requirements can result in the case being dismissed and filing fees forfeited. 

Chapter 7 cases involving few or no assets are more feasible to file on your own where Chapter 13 cases are more complex and generally necessitate the help of an attorney to avoid complications and achieve the desired discharge.

The short answer is possibly. Most consumer debt can be eliminated through a bankruptcy discharge. If you forget to include a debt in the paperwork, however, it will not be discharged. Also, creditors have the opportunity to object to the discharge of any debt. There are 19 categories of debts that are considered "non-dischargeable," including many tax debts, child support, alimony, fines or penalties owed to the government, personal injury debts arising out of drunk driving accidents, criminal restitution, debts based on tax-advantaged retirement plans, and condo fee debts. 

Some debts normally considered non-dischargeable can be discharged if a creditor does not challenge your effort to get them discharged. These include credit card purchases worth more than $650 for luxury goods owed to a single creditor and incurred 90 days before filing, debts incurred due to willful and malicious personal or property injuries, and fraudulently obtained debts. Student loans are only discharged if you can convince the court that repaying the debt is an undue hardship for you.

When you file for bankruptcy, your case becomes a matter of public record. This means that anyone can access court records online or call the bankruptcy court to obtain details regarding your case. Your bankruptcy case involves a Meeting of Creditors that is open to the public, though it is unusual for anyone who is not involved in the case to attend. It may be possible to seal portions of your case, but this only occurs in rare instances. 

Aside from court records, you may be listed in a local newspaper in relation to any public notices that are relevant to your case. Additionally, lenders you approach to apply for credit, and possibly employers, will learn of your bankruptcy filing if they review your credit history. However, a bankruptcy generally only stays on your credit report for 7 to 10 years, depending on whether you have filed Chapter 7 or Chapter 13 bankruptcy. 

Realistically, neither friends nor employers are likely to find out about your bankruptcy filing unless you disclose it to them, unless they look for it specifically.

The impact of bankruptcy on your business depends on which chapter you file. Only individuals can file Chapter 13, so it can be used to reorganize the personal and business debts of a sole proprietor, but it will not affect a corporation, partnership, or limited liability company. A business will file under Chapter 7 or Chapter 11. To understand the differences between these two types of business bankruptcies, head to our blog on Understanding the Differences Between Chapter 11 & Chapter 7 Bankruptcy.

It is common for people to file for bankruptcy to stop a foreclosure or repossession of vehicles or equipment. Filing for bankruptcy triggers an automatic stay, requiring creditors to stop their collection efforts - including attempts to foreclose on or repossess property. Whether the bankruptcy fully stops foreclosure or repossession, or just delays these events, depends on the chapter of bankruptcy you file. 

Filing Chapter 7 bankruptcy allows you to delay a foreclosure sale for 3-4 months. It can buy you time to negotiate with a lender to modify the change the loan period or loan terms of the mortgage. However, a lender may move to lift the stay. Filing for Chapter 13 can not only stop the sale, but also allow you to propose a debt repayment plan that will cover arrearages as well as mortgage payments that come due during bankruptcy. As long as the plan is approved and you make timely payments on this plan over the 3-5 years of bankruptcy, you can avoid foreclosure altogether. Moreover, you may be able to strip any junior mortgages that are not secured from your home. 

While a Chapter 7 automatic stay stops a lender from repossessing your car, the lender can and probably will ask the court to lift the stay, unless you show that you are going to catch up on car payments or cure a default. The lender will need to show the court that its interests are inadequately protected because you have failed to make timely payments on the loan or you are in default. In most cases, if you cannot afford to catch up on car payments or cure your default, the court will lift the stay and will not stop a lender from repossessing your vehicle. 

However, you should be able to stop a repossession altogether if you adequately address arrearages and upcoming car loan payments in your Chapter 13 debt repayment plan. To keep your vehicle, you will also need to make adequate protection payments from the date your file for bankruptcy until the date the judge approves the plan.

Medical debt is one of the primary causes of bankruptcy for individuals. Medical bills usually represent a form of unsecured debt, and they can be discharged through bankruptcy. 

In terms of how your debts are prioritized in repayment, the trustee handling your bankruptcy case will pay off secured debts (such as mortgages, car, or other debts secured by property) with any available assets first. Medical debt, like credit card debt, is not likely to be tied to any collateral, meaning that medical creditors in many cases are left without payment after secured debts and higher priority unsecured debts (like child support and taxes) are paid off. Whether you file for Chapter 7 or Chapter 13 bankruptcy can often impact the extent to which any unsecured debts are satisfied.

Student loans are considered non-dischargeable unless you can prove to the court that repaying the loans would be an undue hardship. You must file a Complaint to determine dischargeability with the bankruptcy court, which will initiate a separate adversary proceeding. 

Different courts use different undue hardship tests, but most courts only grant a student loan discharge if you suffer a serious disability that prevents you from working, you have dependents, or you are elderly. Under one test, known as the Brunner test, you can only obtain a discharge if: (1) repaying student loans would result in you and your dependents living in impoverished circumstances, unable to maintain a basic standard of living; (2) your situation will continue over most of the student loan repayment period; and (3) you tried in good faith to repay the loan. Another hardship test looks at the totality of the circumstances. While it is difficult to pass these tests, it is not impossible. 

If you cannot pass the undue hardship test used by your court, you will owe student loans after a Chapter 7 bankruptcy is over. However, you may be able to pay a reduced student loan payment during your debt repayment plan. Regular payments will resume after you have completed your Chapter 13 plan.

Generally speaking, most unsecured debts can be discharged through Chapter 7 bankruptcy. Common types of unsecured debt include credit card debt, medical bills, and personal loans. However, other types of debt may not be dischargeable through bankruptcy, including child or spousal support, some tax debt, and student loans.

In all small business Chapter 7 cases that are not sole proprietorships, no discharges are offered for the business and it is considered effectively defunct after the filing. A trustee will be appointed by the court and subsequently will proceed to liquidate the assets of the company. In turn, he or she will distribute the proceeds from these sales to pay the company’s debts, taking the burden of debt management away from the business owners and putting it in the hands of a capable court-appointed official.

When the burden of debt gets out-of-hand and creditors are hounding you daily, the prospect of bankruptcy protection can be very appealing. While Chapter 7 is frequently the more attractive choice due to the ability to discharge the most unsecured debts, there are specific requirements for Chapter 7 eligibility that you may not meet. 

If your income over the last six months was higher than the median for a household of your size and your disposable income is too great, you will not be eligible for the options afforded to debtors by Chapter 7 bankruptcy. Determining eligibility can be complex, but a skilled attorney can help advise you on how best to proceed.

In some situations, Chapter 13 may offer a more appropriate solution to your unique financial situation, even if you are eligible for Chapter 7. Filing for Chapter 13 bankruptcy has the following advantages: 

• You can keep your car or house, even if you are behind on payments. 
• Your co-debtor cannot be pursued for debts following your filing. 
• You may be viewed more favorably by prospective creditors in the future because you paid your debts. 

It allows you to restructure the terms of your repayment agreements with creditors. 

There is no universally applicable rule of thumb in deciding whether to pursue Chapter 7 or Chapter 13, and it is advisable to consult with a competent bankruptcy lawyer about your own situation.

A successful Chapter 13 bankruptcy case may offer a desirable path forward to those who are earning income but are unable to keep up with their debts. It allows debtors to restructure their payment arrangements and satisfy these obligations over an extended period of time. For some, however, this may actually be a disservice. Chapter 13 repayment plans require that a large percentage of your outstanding debts, both secured and unsecured, be paid back in full. 

Filing for Chapter 7 bankruptcy offers a variety of advantages, but requires that the filer qualify by taking the means test, demonstrating that they do not have sufficient disposable income to pay back the debts they have accrued. If you do not meet the qualifications for Chapter 7, it is still possible to file for Chapter 13 bankruptcy.

Filing for Chapter 7 bankruptcy is an advantageous decision for many people. It has the following advantages: 

• You are not required to pay back any portion of your unsecured debts, as all eligible debts will be discharged. 
• You will most likely be able to retain all property that you own. 
• Chapter 7 proceedings move quickly. Most cases are completed in three to six months, whereas Chapter 13 bankruptcy involves a three-to-five-year payment plan. 
• When you have very limited disposable income and little or no real property, Chapter 7 bankruptcy is an excellent means to discharge most, if not all of your unsecured debt.

Under Chapter 7 bankruptcy, some of a debtor’s assets may be liquidated in order to provide compensation to the individual’s creditors. However, many, if not most, types of property are typically considered to be exempt, or protected, from the liquidation process, including a debtor’s home, motor vehicle, necessary household appliances, professional tools, and many other goods. If you are considering Chapter 7 bankruptcy, an experienced attorney can help you review your situation and determine what exemptions you may qualify for.

Chapter 7 is not available for business entities, but as the owner of a sole proprietorship, your business debts are also your personal debts. In this circumstance, filing for Chapter 7 is particularly advantageous as it will allow you to discharge all of your unsecured debt both personally and from your business. In circumstances such as this, it is actually possible to continue operating the business following bankruptcy.

The most serious debts you owe are those which are backed by collateral or secured against default. This includes mortgages, car loans, and any other debts which are backed by real property. Any other debt you owe is considered unsecured and you cannot be forced to surrender property or wages on such debts unless your creditors obtain a court judgment against you. Credit cards, personal loans, and department store debt are all examples of unsecured debt. 

Learn more about secured vs. unsecured debt.

The distinction between a secured debt and an unsecured debt makes an enormous amount of difference in bankruptcy proceedings as collections and discharges are determined by the security of the debt. A secured debt is any financial obligation you owe which is backed by collateral. This means that the creditor can recover a specific item of value in the event of a default. Some of the most common types of secured debts are car loans and mortgages, where the car or house is the collateral, but various other types of debts may also be secured. A perfected lien also qualifies as a secured debt. 

Learn more about secured vs. unsecured debt.

One of the primary benefits of filing for bankruptcy is the protection the bankruptcy court offers you from creditors and collectors during your bankruptcy proceedings. When you file, the court grants you an ‘automatic stay’ on the collection of debt, which means that all creditors are legally barred from attempting to recover money from you. It is possible for a creditor to regain the right to attempt collections, but only if they receive special dispensation from the court. 

The automatic stay can also temporarily stop foreclosure proceedings, utility shut-offs, and evictions. However, the stay will likely not apply to certain proceedings, such as legal actions to collect child support or alimony, and certain IRS matters. In some cases, creditors may also ask the court to lift the stay.