What is Bankruptcy Law?
Understanding the essentials and positioning yourself for growth
on December 15, 2016
Updated on October 24, 2022
No one ever wants to go bankrupt. However, sometimes it’s necessary to reorganize one’s debt and get financial affairs in order.
Filing bankruptcy is more than a way to get out of debt; it is a legal tool that has helped countless families and businesses reorganize and rebuild in the wake of severe financial hardship. Choosing bankruptcy for yourself, your family, or your business can be a stressful decision, but the process of gathering the information and help you need doesn’t have to be.
Understanding bankruptcy code and how best to use this legal capability can help position you or your business for growth at the end of the process. Whether that is knowing which chapter you should file or what kinds of debts you can and cannot eliminate, the information on this page is designed to help you get started with some bankruptcy basics. After reading, consider whether the next step is to talk with an attorney.
Bankruptcy Law – What You Need to Know
- Bankruptcy proceedings help individuals and businesses get a fresh start from debt.
- Understanding how to position yourself or your business for growth at the end of the bankruptcy process is critical.
- There are different types of bankruptcy filings, and their availability depends on your circumstances.
- These different kinds of bankruptcy can also handle debt differently, removing the debt entirely in some cases or allowing for a restructured payment plan in others.
The Types of Bankruptcy
Bankruptcy is a process that helps individuals and businesses find relief from debt. There are different kinds of bankruptcy, and not all are available in all circumstances. These types of bankruptcy, referred to as “Chapters” due to their placement in the U.S. Bankruptcy Code, can also handle debt differently. They can remove the debt entirely in some cases or allow for a restructured payment plan in others.
Which type of bankruptcy you might file under can be influenced by many factors, such as whether you are a person or a business, whether you have reasonable means to pay back your debt or not, and the amount of debt you might be facing.
Chapter 7 Bankruptcy
Chapter 7 is the most common form of bankruptcy in the United States. Under this chapter, both individuals and business can sell their assets to pay their creditors. You have probably heard this type of bankruptcy referred to generally as “liquidation.” Some property is exempt from liquidation.
Chapter 7 bankruptcy proceedings can discharge credit card debt, medical bills, and personal loans but will not discharge taxes, student loans, child support, or spousal maintenance.
Chapter 11 Bankruptcy
Chapter 11 bankruptcy is an alternative to Chapter 7 that is most commonly used by businesses. Individuals typically only file for Chapter 11 when they don’t want to liquidate all their assets but don’t meet the debt requirements of Chapter 13.
Chapter 11 allows business debtors to remain in business and adjust their debt. This type of bankruptcy is thought of as a restructuring or reorganization of the business. Companies may file for Chapter 11 bankruptcy voluntarily, or creditors may file a petition with the bankruptcy court to force Chapter 11 on a business. The business will create a reorganization plan that will allow it to pay its bills over time.
Chapter 11 bankruptcy may also affect corporate partnerships and stakeholders.
Chapter 12 Bankruptcy
Chapter 12 bankruptcy allows family farmers or family fishers to create and carry out a plan to repay their debts, much like Chapter 11. Qualifying debtors will be given a specific amount of time to complete their payment plan—usually five years. Still, allowances are often made because farming and fishing are seasonal in nature. Chapter 12 bankruptcy applies to a specific group of debtors, and the bankruptcy courts have a strict definition of who qualifies.
Chapter 13 Bankruptcy
Chapter 13 bankruptcy is an alternative to Chapter 7 available to individuals. Sole business proprietors may also be eligible for Chapter 13 in some cases. Chapter 13 allows debtors to create a repayment plan under which they will repay all or part of their debts over a period of time—usually three to five years.
Filing a Chapter 13 bankruptcy petition automatically stops most collection actions in a process known as a “stay,” but this does not apply to all collection actions. To qualify for Chapter 13 bankruptcy, a debtor must meet specific income and debt requirements.
Common Questions to Ask a Bankruptcy Attorney
Below are some common questions you might want to consider when meeting with an attorney.
- What types of bankruptcy cases have you worked on in the past?
- Should I file for bankruptcy?
- What happens when I file for bankruptcy?
- Will I lose my personal property if I file for bankruptcy?
- What do the “chapters” mean, and which one is appropriate for my situation?
- Which bankruptcy forms do I need?
- What if I have unsecured debts?
- How does bankruptcy filing affect my credit rating?
- Are there debts that can’t be discharged in bankruptcy?
Finding the Right Attorney for Your Needs
It is essential to approach the right type of attorney so that you can make sure you hire someone who can help you through your entire case. To do this, visit the Super Lawyers directory and use the search box to find a lawyer based on your legal issue or location.
How Much Will It Cost?
From chapter to chapter, state to state, and case to case, bankruptcies vary in cost. It is advisable to speak with multiple attorneys before you decide which to hire, and all of them should estimate the price in that initial meeting.
“Generally, in Nevada, a Chapter 7 ranges from $2,000 to $3,000,” says Nedda Ghandi, an attorney at Ghandi Deeter Blackham in Las Vegas. “A Chapter 13 is a little bit less out of the gate—meaning you pay less upfront, between $1,000 and $2,000. But the overall cost is between $5,000 and $7,000 over the course of five years.”
Should I Talk to a Lawyer?
Each chapter of bankruptcy has specific requirements that must be met, including income and debt requirements, filing requirements, and evidence requirements. Because each bankruptcy chapter protects you and your assets differently, it will be crucial to make sure you file under the chapter that best fits your situation.
A lawyer will anticipate potential problems with your case and advise you on approaching them. Your lawyer will also keep track of deadlines and file all the paperwork with the necessary courts and agencies, giving you one less thing to worry about.