Bankruptcy is a legal process that allows a person who is unable to pay his or her creditors the opportunity to clear or restructure the debt. When making the decision to file bankruptcy, speaking to an experienced bankruptcy lawyer is strongly recommended. A lawyer can explain the different types of bankruptcy options that are available as well as the impact a bankruptcy can have on your life.
Bankruptcy falls into one of two categories: liquidation and reorganization. Chapter 7, the most common type of bankruptcy, is in the liquidation category. If you file Chapter 7, the court will appoint a trustee who will collect your non-exempt property in order to sell it and divide the proceeds among your creditors.
Chapters 11, 12, and 13 allow you to reorganize your debt in order to pay off your creditors. Most individuals file Chapter 13—Chapter 11 is typically for businesses and those with large debts while Chapter 12 is for family farms. Chapter 13 allows you to keep all of your property while paying off your debt within three to five years.
Bankruptcy proceedings can be initiated by either or debtor or creditor. After filing a bankruptcy request, the court will issue an automatic stay, which prohibits creditors from contacting the debtor to collect the money owed outside of the legal proceedings and prohibits the debtor from transferring any property listed in the bankruptcy documents.
After the request is filed, the court will decide if the debtor is eligible for bankruptcy. If the bankruptcy request is approved, the court will set up a 341 meeting of creditors and list the documents (such as paycheck stubs, bank statements, vehicle titles, etc) that the debtor should gather. During the meeting, a court-appointed trustee will review the documents and petition and interview the debtor.
Depending on the type of bankruptcy filed, the non-exempt property may be seized and distributed among the creditors. Please note that not all types of debt can be discharged by filing bankruptcy; student loan debt, spousal support, and child support must still be repaid. The court may also order the debtor to attend a money management course.