Bankruptcy

Bankruptcy is a legal process in a specialized federal court to help individuals and

businesses get rid of debt or repay debts under the protection of the bankruptcy
court.
All bankruptcy cases are filed in federal bankruptcy court in the area where you
live or where your business is located. There are two main categories of
bankruptcy: “liquidation” and “reorganization.” Liquidation bankruptcy (also
called Chapter 7 bankruptcy) is usually used by individuals (and sometimes by
businesses) whose expenses are greater than their income, and who cannot pay
their debts. One of the main purposes of liquidation bankruptcy is to wipe out
certain debt and give you a fresh start. In an individual liquidation bankruptcy, the
court will discharge certain debts that you owe, which means that the debts do
not have to be paid. In exchange for the discharge, though, your nonexempt
property (if any) may be sold, and the money used to pay your creditors.
Reorganization bankruptcy can be used only if you have sufficient income to pay
most of your debts over a period of time. There are several types of
reorganization bankruptcies, but Chapter 13 is the type most commonly used by
individuals or consumers. In Chapter 13 bankruptcy, you keep all of your property,
but you must make monthly payments over three to five years to repay all or
some of your debts. Reorganization bankruptcy requires that you file a repayment
plan that has to get approved by the bankruptcy court.
Once you have filed bankruptcy, your creditors cannot go after your assets by
garnishing your wages, repossessing your car, foreclosing on your house, or
cutting off your utility services. This is called the “automatic stay.” At the end of
the bankruptcy process, all of your debts are discharged or wiped out, except
those debts that cannot be discharged in bankruptcy, such as child
support, spousal support, student loans (except under extraordinary
circumstances), and most tax debts.
Bankruptcy may allow a business (or individual) to
 Reject (get out of) unfavorable contracts and leases.
 Keep contracts or leases that it wants to retain if it
can afford to satisfy arrears over a reasonable
period.
 Keep property or equipment that is subject to a
mortgage or security interest and reduce the
payments to secured creditors to be based on the
value of the property (there are stricter and different
rules for individuals dealing with the value of their
homes).
 Surrender or give up secured property that is no
longer wanted, needed, or that they cannot afford to
keep.
 Pay unsecured creditors a fraction of the amounts
due (with the payments based on the value of the
assets and/or future income streams).
 Pay past due taxes over five years.