What is bankruptcy (short definition)
– Bankruptcy is a federal legal process that lets an individual or business get relief from debts that cannot be repaid. The court either orders the sale of certain non‑protected property to pay creditors (liquidation) or supervises a court‑approved repayment plan (reorganization). The goal is to resolve creditor claims and, where allowed, give the debtor a fresh start.
Key terms (definitions on first use)
– Unsecured debt: debt not backed by collateral (examples: most credit cards, medical bills).
– Secured debt: debt backed by collateral (examples: mortgages, auto loans). The lender can repossess or foreclose on collateral if payments aren’t kept current.
– Trustee: a court‑appointed official who administers the bankruptcy case, reviews documents, and may sell non‑exempt assets or monitor a repayment plan.
– Automatic stay: the immediate court order that temporarily stops most creditor collection actions (foreclosure, lawsuits, garnishments) after a bankruptcy petition is filed.
– Discharge: a final court order releasing the debtor from personal liability on qualifying debts; creditors can no longer collect discharged debts.
How the bankruptcy process generally works (step‑by‑step)
1. Prepare and file a petition in federal bankruptcy court. The petition lists assets, liabilities, income, expenses, and recent financial transactions.
2. An automatic stay goes into effect, pausing most creditor actions.
3. A trustee is assigned to the case.
4. The debtor attends a meeting of creditors (often called a Section 341 meeting) where the trustee and creditors can ask questions about the petition and finances.
5. The trustee evaluates whether assets should be sold (liquidation) or whether a repayment plan should be confirmed.
6. After completing required steps and court approval, qualifying debts may be discharged. Some debts are excluded from discharge (see below).
7. Credit reporting records reflect the bankruptcy for years, which can affect future borrowing.
Major types of consumer/business bankruptcy filings
– Chapter 7 (liquidation): Common for individuals who qualify. Non‑exempt assets can be sold to pay creditors; most unsecured debts can be discharged. Eligibility depends on income (if household income is above the state median, a means test applies).
– Chapter 11 (reorganization): Primarily used by businesses to continue operations while restructuring debts. Individuals with very large debts can also use Chapter 11. The filer must propose a reorganization plan (usually submitted within a court‑specified period) and get creditor and court approval.
– Chapter 13 (repayment
13 (repayment): A court‑supervised repayment plan for individuals with regular income. Under Chapter 13 the filer proposes to repay some or all debts over a fixed period (usually three to five years) using future earnings. Chapter 13 allows debtors to keep property — including homes subject to mortgage arrears — by curing delinquent payments over the plan term. Eligibility is limited by statutory debt ceilings for secured and unsecured debt (these limits change periodically), and certain priority claims (for example, domestic support obligations and some taxes) must be paid in full through the plan.
Other chapters and special cases:
– Chapter 9: Municipal reorganizations for towns, cities, school districts, and similar public entities.
– Chapter 12: A streamlined reorganization process for family farmers and fishermen with regular seasonal income.
– Chapter 15: Handles cross‑border insolvency cases involving debtors, assets, creditors, and other parties in more than one country.
– Involuntary bankruptcy: Creditors can force a bankruptcy filing against a business or individual under limited circumstances when payment is not forthcoming.
Key concepts and how they work (definitions on first use):
– Automatic stay: A court order that immediately halts most collection actions (foreclosure, repossession, garnishment, lawsuits) once the bankruptcy petition is filed. Exceptions exist (certain tax and criminal proceedings, domestic support enforcement, for example).
– Trustee: An impartial officer appointed in many bankruptcy cases to administer the estate — gathering non‑exempt assets, reviewing creditor claims, and distributing funds according to the bankruptcy code.
– Secured debt: Debt backed by collateral (e.g., a mortgage or car loan). If the debtor keeps the collateral, the creditor usually retains a lien and can be paid through the plan or by reaffirmation.
– Unsecured debt: Debt without collateral (e.g., credit cards, medical bills). Treatment depends on chapter and the debtor’s repayment ability.
– Priority claims: Certain debts receive higher priority and are paid before general unsecured creditors (examples include administrative expenses, recent taxes, and domestic support obligations).
– Discharge: A court order that eliminates the debtor’s personal liability for specified debts. Some debts are non‑dischargeable (see checklist below).
Practical checklist — what debts typically survive bankruptcy (non‑dischargeable):
– Recent domestic support obligations (child support, alimony).
– Most student loans (unless the debtor proves “undue hardship” in a separate adversary proceeding).
– Certain tax debts (depends on age and type of tax).
– Debts incurred by fraud, embezzlement, or willful misconduct where the creditor obtains a non‑dischargeability ruling.
– Government fines and penalties, and some criminal restitution.
Note: Laws vary by jurisdiction and fact pattern; a creditor must usually request a court determination to except the debt from discharge.
Step‑by‑step filing timeline (typical for an individual consumer):
1. Pre‑filing credit counseling (required within 180 days before filing).
2. File petition and schedules with the bankruptcy court (lists assets, liabilities, income, expenses, contracts).
3. Automatic stay goes into effect immediately upon filing.
4. Trustee appointment and review of documents.
5. 341 meeting of creditors (creditors may ask questions under oath).
6. For Chapter 13: confirmation hearing on the repayment plan; for Chapter 7: trustee evaluates non‑exempt assets for liquidation.
7. Completion of plan payments (Chapter 13) or trustee distribution (Chapter 7).
8. Debtor receives discharge (subject to exceptions) and case is closed.
Typical durations: Chapter 7 cases often complete in 3–6 months after filing. Chapter 13 lasts the plan term (usually 36–60 months) plus a short period for final discharge and closing.
Worked numerical example — simplified Chapter 13 payment calculation:
Scenario: Debtor has
– Priority claims (tax liens, domestic support) totaling $10,000 (must be paid in full).
– Secured arrears on a car of $5,000 (must be cured through the plan to keep the car).
– Unsecured credit card balances totaling $25,000.
Assume the court determines a 60‑month plan. A practical approach to estimate the required monthly plan payment:
1. Sum amounts required to be paid through the plan: $10,000 (priority) + $5,000 (secured arrears) = $15,000.
2. If disposable income rules require the debtor to pay, say,
$400 per month toward unsecured creditors (based on income minus allowed expenses). Over a 60‑month plan that’s $400 × 60 = $24,000 allocated to unsecured creditors.
3. Add required payments that go through the plan:
– Priority + secured arrears = $15,000 (from step 1)
– Disposable‑income allocation to unsecured creditors = $24,000
Total plan payments = $15,000 + $24,000 = $39,000.
4. Estimate the monthly plan payment:
– Total plan payments ÷ plan months = $39,000 ÷ 60 = $650 per month.
5. Compare the total to unsecured claim amounts:
– Unsecured claims are $25,000. The plan pays $24,000 toward unsecureds, so unsecured creditors receive roughly 96% of their claims (subject to trustee fees, priority payment order, and any adjustments).
– If disposable income required were lower (or the plan term shorter), the percentage paid to unsecured creditors would fall.
Key assumptions and caveats
– “Disposable income” here means the debtor’s monthly income remaining after allowed living expenses and required payments (as determined under the Bankruptcy Code and local rules). Actual disposable‑income tests and allowed expenses vary by jurisdiction and case specifics.
– Trustee fees, attorney fees paid through the plan, and post‑petition interest on secured debt may change the monthly payment.
– Some priority claims (like certain taxes or domestic‑support obligations) must be paid in full; others may have special rules.
– This example ignores interest on unsecured claims (usually unsecured creditors do not receive post‑petition interest in Chapter 13 unless the plan provides for it).
– Local practice and judge discretion can affect how payments are allocated; consult court rules or counsel for precise calculations.
Practical checklist before considering Chapter 13
1. Run the means test to confirm Chapter 7 eligibility or need for Chapter 13. (Means test determines whether income is high enough to require repayment under Chapter 13.)
2. Gather documents:
– Six months of pay stubs or proof of income
– Recent tax returns
– List of assets and secured debts (vehicle loans, mortgages)
– List of unsecured debts and monthly expenses
– Recent bank statements
3. Complete required credit counseling (pre‑filing) from an approved agency.
4. Estimate disposable income and draft a proposed plan budget (include priority, secured arrears, unsecured allocation, trustee and attorney fees).
5. Discuss alternatives: informal negotiations with creditors, debt management plan, settlement, or Chapter 7 (if eligible).
6. Understand timelines: filing date, 341 meeting of creditors (§341 meeting), plan confirmation hearing, plan term (typically 36–60 months), and discharge procedure.
What Chapter 13 typically accomplishes (educational summary)
– Stops most collection activity and foreclosure while the plan is running (automatic stay).
– Allows debtors to cure secured‑debt arrears (e.g., reinstate a mortgage or catch up on car payments) while keeping the collateral, subject to plan terms.
– Enables repayment of certain priority debts over time.
– May discharge remaining qualifying unsecured debts at plan completion; some debts (student loans, most taxes, domestic support obligations) are generally not dischargeable.
How Chapter 13 differs from Chapter 7 (quick comparison)
– Chapter 7: liquidation bankruptcy; nonexempt assets can be sold to pay creditors; many unsecured debts discharged in months; not available if means test fails.
– Chapter 13: repayment plan bankruptcy; keeps property by paying creditors through a court‑approved plan over time; often better for those with regular income who need to catch up secured arrears.
Common costs and timing (typical ranges, not guarantees)
– Filing fee: varies by court (check the local bankruptcy court website).
– Attorney fees: vary widely by complexity and region; some debtors pay fees through the plan.
– Credit counseling and debtor education courses: modest fees charged by approved providers.
– 341 meeting usually occurs about 20–40 days after filing; confirmation hearing timing depends on local schedules.
Resources for authoritative guidance
– U.S. Courts — Bankruptcy Basics: https://www.uscourts.gov/services-forms/bankruptcy
– Consumer Financial Protection Bureau — Filing for bankruptcy: https://www.consumerfinance.gov/consumer-tools/bankruptcy/
– Legal Information Institute (Cornell Law School) — Bankruptcy Code overview: https://www.law.cornell.edu/wex/bankruptcy
– Investopedia — Bankruptcy overview (article referenced): https://www.investopedia.com/terms/b/bankruptcy.asp
Educational disclaimer
This response is for general information and teaching purposes only. It is not individualized legal or financial advice. For decisions about filing bankruptcy, consult a licensed bankruptcy attorney or an approved credit‑counseling agency in your jurisdiction.