Individuals and businesses use bankruptcy as a way to obtain relief from debts owed to creditors.

The United States Constitution authorizes Congress to pass uniform laws on bankruptcy. The Bankruptcy Code (Title 11 of the United States Code) has been amended several times since it was enacted in 1978, most recently with the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005. While there is no constitutional right to relief from debts, relief granted by the bankruptcy courts is available to the extent Congress provides.

The Bankruptcy Code provides for relief from debts either through a liquidation (Chapter 7) or reorganization (Chapters 11, 12, or 13). This pamphlet discusses some of the issues to consider before filing for bankruptcy and the differences between a liquidation case and a reorganization case. Before making any decision about whether to seek bankruptcy protection, one should consult a qualified bankruptcy lawyer.

What types of bankruptcy relief are available?
Individuals are eligible to file for bankruptcy under Chapter 7, Chapter 11, Chapter 12 or Chapter 13 of the Bankruptcy Code.

Chapter 7 bankruptcy is known as straight liquidation.  In a Chapter 7 case, a trustee (assigned by the U.S. Trustee's Office or chosen by the debtor's creditors) may liquidate, or sell, the debtor's non-exempt assets to pay all or a portion of the debts owed to creditors.  Depending upon where the individual debtor lived before filing bankruptcy, he or she may be entitled to keep--or exempt--some or all of the equity in certain kinds of property.  The kind of property that may qualify for an exemption might be a house, car, boat or a household item.  Typically, when estimating the amount of money that can be realized from the sale of a particular item, the bankruptcy trustee will subtract what the individual is allowed to keep--the exempt portion--and also will subtract the outstanding amount of any liens or mortgages. 

Unless the money raised from the sale of the property is expected to be greater than these exemptions and any liens or mortgages, the trustee may decide to abandon the item of property to the debtor, meaning that the debtor gets to keep it.  Through this liquidation process, any debts not paid by the trustee (with certain exceptions) will be discharged (eliminated), and creditors cannot force the individual debtor to pay any remaining amount owed.

Chapter 13 bankruptcy, or individual reorganization, is an alternative to Chapter 7 that generally allows an individual to keep his or her property.  The individual filing bankruptcy under Chapter 13 must have regular income and meet certain debt and asset limits.  Effective October 17, 2005 under the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, individuals who earn more than the median income in the state where they lived before filing bankruptcy, and who can repay at least $6,000 of their debt over five years, are no longer eligible to have their debts wiped out for a fresh start.

Instead, these individuals must repay their creditors over time and enroll in a financial counseling program.  Under Chapter 13, an individual debtor would submit a plan detailing how all of his or her debts will be paid from disposable monthly income (income after providing for ordinary living expenses) over a period of time of up to five years.  The plan of reoorganization is monitored by a Chapter 13 trustee and supervised by the bankruptcy court.  A Chapter 13 debtor must pay his or her creditors at least as much as they would be paid if the debtor's assets were liquidated in a Chapter 7 case.

Chapter 11 "reorganization" is typically used by corporations or businesses as an alternative to Chapter 7 liquidation.  Since a reorganization under Chapter 11 can be a very expensive process, it is not frequently used by individuals.  In a Chapter 11 reorganization, as in a Chapter 13 reorganization, the business debtor may keep certain property and be required to pay creditors with future earnings according to a reorganization plan.

Chapter 12 is a special reorganization for family farmers.  To qualify, a family farmer must earn most of his or her income from family farming operations.

When is it appropriate to file for bankruptcy?
The decision whether to file for bankruptcy is based upon each debtor's unique situation.  A person considering bankruptcy, whether individually or for a business, should consult with an experienced bankruptcy lawyer who can determine whether such an option should be explored and when it would be most beneficial to file.  Generally speaking, it may be appropriate to file for bankruptcy when an individual is unable to pay his or her debts and regular living expenses or when an individual has property (typically a house or car) that he or she wishes to keep from the reach of creditors.

How would I go about filing for bankruptcy relief?
To initiate a bankruptcy, you would file a petition with the appropriate bankruptcy court.  You would be required to pay a filing fee, unless the requirement is waived by the bankruptcy court.  Depending upon the circumstances, you may be able to pay the filing fee in installments.  In addition to filing a petition, you will need to provide detailed information about all your assets and liabilities on documents called schedules.  These documents must include an accurate list of everything you own, the outstanding amount of the debts you owe to all your creditors, as well as personal information about your employment and whether you have made any transfers of money or property just before you filed for bankruptcy.

After these documents are filed, you would meet with a trustee.  Your creditors would be invited to attend this meeting.  The trustee assigned to your case would check the petition and schedules for accuracy.  Also, the trustee and the creditors might ask you questions about your financial situation.

Can a husband and wife file together for bankruptcy?
Yes; it is possible, but not required.  Spouses can file a joint petition if they both need relief from their creditors.  However, depending on the circumstances, one spouse may file for relief under Chapter 7 or 13 and the other spouse may choose not to file at all or may file his or her own separate bankruptcy case.  When spouses file separately, the assets and liabilities for each spouse will be considered separately by the bankruptcy court.

Can the bankruptcy court refuse to discharge my debts in bankruptcy?
Yes.  Filing a bankruptcy petition does not guarantee that your debts will be discharged.

The bankruptcy court may deny a general discharge of debts if you commit certain acts of misconduct before or after the bankruptcy petition, such as destroying, concealing, or removing assets that might otherwise be used to pay creditors.  Also, a discharge of debts may be denied if you have destroyed or concealed records that show what assets are available to pay creditors.  Finally, the bankruptcy court may deny a general discharge if you have lied under oath during the bankruptcy case, or have refused to answer questions without a good reason.

Aside from acts of misconduct, you will not be granted a general Chapter 7 discharge if you have obtained a discharge in a Chapter 7 case within six years before the date that a second bankruptcy is filed.

Even if a discharge of debts is denied, your assets still may be liquidated in a Chapter 7 case, or you may complete your plan in a Chapter 13 case.  The denial of a discharge does not relieve you from your other obligations under the Bankruptcy Code.

If a general discharge is granted, will I still have to pay any debts?
Yes.  Even if a general discharge is granted, some debts are not discharged in bankruptcy.  Further, the type of bankruptcy affects what debts may be discharged.  Generally, more debts are discharged in Chapter 13 than in Chapter 7.  Congress provided for greater relief under Chapter 13 as an incentive to encourage debtors to repay their debts through a reorganization plan.

Debts that might not be discharged in bankruptcy include taxes assessed within 240 days of the bankruptcy filing.  Certain student loan debts, child or spousal support debts arising from a divorce, criminal fines and debts arising from a DUI, and any debt incurred because a debtor has committed fraud, breached a fiduciary duty as a trustee, or committed a "willful" act causing injury to a creditor, also might not be discharged.  The bankruptcy court ultimately will decide whether these types of debts will be discharged.

How does filing bankruptcy affect my credit?
Filing bankruptcy will be noted on your credit record for up to ten years, but the effect of this notation to a particular creditor may depend on whether a discharge was granted or the case was dismissed, and what type of bankruptcy case it was:  a Chapter 13 reorganization or a Chapter 7 liquidation.  Creditors have differing policies regarding the impact on those who have filed bankruptcy.  It is common for individuals who file bankruptcy to have trouble getting a new loan, or they may have to pay a higher rate of interest to secure one.