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What is Bankruptcy?

Bankruptcy is federal law that allows individuals an opportunity to get a fresh start in life and get out from under their debts. This is done by either wiping out ("discharging") the debt, or paying it back over time ("restructuring" it). These different goals of bankruptcy are addressed by different "chapters" in the Code.

Chapter 7 is the orderly liquidation of assets of an individual, married couple, corporation, partnership or LLC. The individual or married couple then gets a fresh start when they emerge (most often without liquidation of assets due to exemptions, which will be discussed later), while the business entity does not emerge, but simply goes out of business.

Chapter 13 allows individual wage earners and self employed sole proprietors with a small amount of business debt to reorganize their debt and pay it back over time (no more than five (5) years), often without the accrual of interest on said debt, and many times without paying all of it back. This gives a great deal of leverage to debtors by allowing them to dictate terms of repayment, and do things like cure mortgage arrears, reduce monthly car payments, and pay back debt such as credit card balances without dealing with the crushing load of the interest rates.

Chapter 11 allows for the reorganization of the debt of corporations and individual sole proprietors with large amounts of business debt. It is also probably the best known of the types of bankruptcy to the general public. Again, this type of bankruptcy is beyond the scope of this booklet, but is mentioned here for the sake of completeness.

Bankruptcy is accomplished with the filing of a bankruptcy petition which is a financial disclosure statement of your financial status as of filing, listing everything owned, owed, earned, and spent. With chapter 13, a proposed plan of reorganization and payment of debts is also filed either with the petition or within fifteen (14) days thereafter.

If you are considering filing bankruptcy, but don't know which chapter is right for you, please contact my office for a free consultation.