Through the U.S. Bankruptcy Code, both individuals and businesses may seek financial relief from most of their debts through different available bankruptcy chapters. Each chapter has its own eligibility guidelines that must be met in order to file under them. There are also different categories of property for individual filers that are exempted from inclusion in the bankruptcy estate. The exemptions occur at both the state level and the federal level, but a bankruptcy petitioner can choose either the federal exemptions or those allowed by the state in which they file. The available chapters under which a petition may be filed include Chapter 7, Chapter 13, Chapter 11 and Chapter 12.
Chapter 7 Bankruptcy
Chapter 7 bankruptcy is known as a liquidation bankruptcy chapter. Under this chapter, the filer's assets that are nonexempt are liquidated by the bankruptcy trustee, with the proceeds used to repay creditors. This is why choosing either the federal exemptions or those allowed under the state is an important decision, as more assets may be exempt under one listing or the other. Upon filing the Chapter 7 petition, the U.S. bankruptcy court issues an automatic stay. When that stay is ordered, creditors must stop all further collection activities.
If the bankruptcy estate is successfully discharged, most unsecured creditors will be prevented from attempting to collect on discharged debts, absolving the debtor of the responsibility to repay them. In order to be eligible for Chapter 7 bankruptcy, the debtor's income must fall below the median income for the state in which they file. If their income is at or above the state median, then they may still be eligible if they pass a means test.
Chapter 13 Bankruptcy
A Chapter 13 bankruptcy is a type of bankruptcy in which the debtor is required to complete a repayment plan that generally lasts three to five years. Plans may not be for longer than five years under the code. Eligibility for Chapter 13 bankruptcy includes that a person's unsecured debts and secured debts may not exceed specified limits. If the repayment plan is successfully completed, the debtor's remaining debt balances from the bankruptcy are discharged, and he or she may begin to build credit again.
Chapter 11 Bankruptcy
Chapter 11 bankruptcy is a reorganization of debts that allows a business to remain open while they pay a portion of the owed debts through their debt reorganization and repayment plan. The debts included in the plan are paid according to their order of priority, with secured creditors being repaid before unsecured creditors. The bankruptcy court may require the business to repay either all of their debts or a portion established by the court. During the reorganization, the business will be supervised by the court. If the plan is completed, the court may grant the business either partial or total relief from its debts. Chapter 11 is also sometimes used by individuals whose debts exceed the limits imposed by Chapter 7 and Chapter 13.
Chapter 12 Bankruptcy
A Chapter 12 bankruptcy is a chapter specifically designed for family farmers or fishing businesses. Like Chapters 13 and 11, Chapter 12 involves a restructuring of the debts owed through a repayment plan. Farmers choose this filing chapter in order to be able to keep their farms after bankruptcy.
The Role of a Bankruptcy Lawyer
Bankruptcy lawyers have a number of tasks they may fulfill to help their clients. Lawyers who have experience in bankruptcy law may help their clients determine under which chapter they may be eligible to file. They may then help to draft the petition and tell clients the types of documents they need to gather. After the petition and schedules are filed, the bankruptcy law attorney may attend the creditor's meeting, contact creditors so that they stop collection activities and attend required court hearings.
Choosing to file bankruptcy is often a difficult decision for people and businesses. It does have the potential to provide them with the relief they need so that they can move forward. Potential filers should be aware that not all debts are dischargeable through bankruptcy, so they may want to investigate whether their debts may be discharged.
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