Bankruptcy is a legal process that aims to provide relief to individuals and businesses who find themselves unable to repay their debts. It offers a fresh financial start by eliminating debts or providing a structured repayment plan. The fundamental purpose of bankruptcy is to help debtors (the person who has borrowed money) regain financial stability while protecting the rights of creditors (the person or entity who has lent money).
At Kurtz Law, we understand that bankruptcy is a deeply personal matter, and we approach all our cases with respect and empathy. Here we’ll provide a bit more information on bankruptcy so you can make an informed decision on how you want to approach your financial situation.
Bankruptcy is a legally protected status that can be declared if your financial liabilities surpass your financial assets. In other words, if you owe more money than you can reasonably pay. This is referred to as insolvency, which results in an inability to repay debts.
In the United States, bankruptcy is protected under federal law. It is a legal right granted to every citizen, although there are many stipulations and conditions that must be met before bankruptcy can be granted.
Bankruptcy cases are typically handled by specialized bankruptcy courts, where professionals oversee cases, review claims, and ensure legal compliance. These courts may appoint trustees to manage cases individually, especially if the bankruptcy claim is from a business entity.
Like any legal process, bankruptcy is complex and full of intricacies. If you are considering filing for bankruptcy, it is highly recommended that you have an experienced bankruptcy attorney review your case and work with you to file.
Types of Bankruptcy
Chapter 7 Bankruptcy – Also known as liquidation bankruptcy, Chapter 7 allows individuals with limited income and significant debt to obtain relief by discharging eligible debts through the sale of non-exempt assets.
Chapter 13 Bankruptcy – Chapter 13 bankruptcy offers individuals with a regular income the opportunity to reorganize their debts and create a manageable repayment plan over three to five years. Debtors can retain their assets while making regular payments to creditors.
Chapter 7 Business Bankruptcy – Similar to Chapter 7 personal bankruptcy, Chapter 7 business bankruptcy involves the liquidation of assets to repay debts. Once the assets are sold and the proceeds distributed, the business ceases operations.
Chapter 11 Bankruptcy – Chapter 11 bankruptcy is a reorganization process primarily aimed at businesses. It enables companies to continue operating while developing a plan to restructure their debts and operations.
The Bankruptcy Process
In this section, we’ll define some of the major steps in the bankruptcy process so you have a grasp of the various terms and stages if you should decide to file.
Filing for Bankruptcy
Eligibility and Means Test – Debtors must meet specific eligibility criteria to file for bankruptcy, such as residency, income limitations, and debt thresholds. In some cases, debtors must also undergo a means test to determine their ability to repay debts.
Bankruptcy Petition and Schedules – Debtors initiate the bankruptcy process by filing a petition with the appropriate bankruptcy court. They must provide detailed information about their financial situation, including debts, assets, income, expenses, and creditors.
Automatic Stay – An automatic stay is a major benefit of filing for bankruptcy. Once a bankruptcy petition is filed, an automatic stay goes into effect. This legal injunction halts most collection actions by creditors, including lawsuits, foreclosures, wage garnishments, and collection calls, providing debtors with some relief and breathing room.
Creditor Meeting and Plan Confirmation – Debtors are required to attend a meeting of creditors where they answer questions under oath about their financial affairs. You will often hear this referred to as the ‘341’ meeting, as it is required by Section 341 of the Bankruptcy Code. Following this meeting, a bankruptcy plan is proposed, and creditors have the opportunity to approve or object to the plan.
Discharge vs Repayment
Discharge – In Chapter 7 bankruptcy, eligible debts are discharged (eliminated), relieving debtors of their obligation to pay the creditors. Discharging provides a fresh start, although some debts are not eligible to be discharged, such as student loans, tax payments, etc.
Repayment – In Chapter 11 or Chapter 13 bankruptcy, debtors follow an approved repayment plan, making regular payments to creditors over a specified period. Once the repayment plan is completed, remaining eligible debts may be discharged.
The Impact of Bankruptcy
Credit Score and Future Borrowing
Bankruptcy will have a significant impact on an individual’s credit score and their ability to obtain credit or loans in the future. Bankruptcy filing remains on an individual’s credit report for a predetermined period (generally 7 – 10 years, depending on the type of bankruptcy). However, credit can be rebuilt with time and proper financial management.
Assets and Exemptions
The treatment of assets varies depending on the type of bankruptcy and jurisdiction. Some assets may be exempt from liquidation, allowing debtors to retain essential possessions or protect certain property, providing a sense of stability during a challenging time.
While bankruptcy is often seen as a last resort, it offers an opportunity for financial rehabilitation. Through budgeting, financial education, and responsible financial management, individuals can rebuild their credit and regain financial stability, ultimately working towards a brighter future.
Bankruptcy in Summary
Bankruptcy is a legal process that aims to provide relief and a fresh start to individuals and businesses burdened by overwhelming debt. By approaching the subject of bankruptcy with empathy and understanding, we recognize the challenges faced by those going through financial difficulties.
It’s important to consult with a qualified bankruptcy attorney or financial professional who can offer guidance and support, ensuring informed decisions are made regarding the best course of action for each unique situation. Remember, there is hope for a better financial future, and bankruptcy can be a stepping stone toward regaining control and achieving stability.