Bankruptcy Basics

Bankruptcy in the United States seeks to benefit both debtors and creditors by seeing that debtors get relief from debts they can't pay, and that creditors get paid from whatever assets the debtor does not need to live going forward.

Bankruptcy is governed by the federal law found in Title 11 of the United States Code. As federal law, it supercedes any conflicting state law by reason of the Supremacy Clause of the Constitution. With the exception of exempions, it is the same from state to state.

Bankruptcy Chapters

There are two main kinds of bankruptcy proceedings. They are referred to by the chapter of the federal Bankruptcy Code that describes them.

Chapter 7

Chapter 7 is the most common form of bankruptcy. It is a liquidation proceeding in which the debtor's non-exempt assets, if any, are sold by the Chapter 7 trustee and the proceeds distributed to creditors according to the priorities among creditors established in the Code.

Chapter 7 is available to individuals, married couples, corporations and partnerships. Individual debtors get a discharge within 4-6 months of filing the case.

If there are assets which are not exempt, the trustee takes control of those assets, sells them and pays creditors as much as the proceeds permit.

Any wages the debtor earns after the case is begun are the debtor's; the creditors have no claim on those earnings.

Chapter 13

Chapter 13 is a repayment plan for individuals with regular income and unsecured debt less than $336,900 and secured debt less than $1,010,650.

The debtor keeps his property and makes regular payments to the Chapter 13 trustee out of future income to pay creditors over time (3-5 years).

Repayment in Chapter 13 can range from 10% to 100% depending on the debtor's income and the make up of the debt.

Certain debts that cannot be discharged in Chapter 7 can be discharged in Chapter 13. Chapter 13 also provides a mechanism for individuals to prevent foreclosures and repossessions, while catching up on their secured debts.