Bankruptcy Law: Frequently Asked Questions

What really happens when an individual or a business declares bankruptcy? Is it an easy fix to a business venture gone down the tubes? Will it save an individual from hideous debt? Bankruptcy is one of the least understood aspects of the law, and because there is a social stigma placed upon bankruptcy, it's also a topic that few like to talk about.�

What exactly is bankruptcy?

There are actually two different types of bankruptcy: liquidation and reorganization, under chapters seven and thirteen respectively. A liquidation bankruptcy involves selling off one's major assets to pay off as much debt as possible before having�the rest of the debt absolved. Reorganization bankruptcy refers to the process of spreading debt payments out over a period of three to five years, eliminating some debts�and reducing others.

Bankruptcy is a process of the federal court system, and an individual or business must first file for bankruptcy before it is approved. Once it is approved, individuals or businesses can eliminate their debt under the protection of the bankruptcy court. Not everyone can qualify for bankruptcy, and it is certainly not a quick fix for poor business decisions. Bankruptcy will also not work on all types of debts; it only applies to unsecured loans (for which you have put up no collateral), medical bills, credit cards and the like.

What is an "automatic stay"?

When you file for bankruptcy, the court puts something called an automatic stay on all of your debts. When this is in place, creditors to whom you owe money are not able to take action against you in order to collect those debts. If, for whatever reason, the automatic stay is lifted, then the creditors are allowed to proceed with their normal collections process.

What is the difference between liquidation and reorganization?

When you choose Chapter Seven bankruptcy - also called "liquidation" - you file a request with the bankruptcy court to remove all of your debt, and in return you will be required to liquidate (sell off) your assets. Some assets - such as your clothing, furniture, and other acquired items - are immune to the liquidation process, but most people who file for liquidation bankruptcy will lose their homes, their cars and other major assets. The money collected from this liquidation is used to pay off a portion of your debts.

Filing for liquidation bankruptcy costs approximately $250 to file in the courts, and takes between four and six months to complete. People who qualify - according to their income reports - for Chapter Thirteen bankruptcy may not be eligible for liquidation.

In Chapter Thirteen bankruptcy - reorganization - you file a petition with the bankruptcy court that includes a schedule of payments that you will make to your debtors. This allows you to effectively consolidate your debt and pay it all off over a period of three to five years. In order to qualify for reorganization, you must have sufficient income to meet the payments to which you agree. If not, you will not be approved.

Reorganization requres that you have no more than $100,000 in secured debts and no more than $300,000 in unsecured debts. Secured debts are those for which the creditors are allowed to remove your property in the event of nonpayment, such as repossession of a financed vehicle.

What if I meet the eligibility requirements for both liquidation and reorganization?

Those few candidates who qualify for either liquidation or reorganization bankruptcy have the option of choosing which they prefer. Most people choose liquidation if they have the option because it does not require that the individual or business repay their debts to their creditors. However, those who file for liquidation bankruptcy are elligible to lose all of their assets.