Bankruptcy Overview

Bankruptcy is a federal court process designed to help consumers and businesses eliminate their debts or repay them under the protection of the bankruptcy court.  Bankruptcies are generally described as “liquidations” or “reorganizations.”

Chapter 7 bankruptcy can be filed by individuals or businesses and involves liquidation of the bankrupt’s assets.  A Chapter 7 bankruptcy typically lasts three to six months.

Chapter 11 bankruptcy is used primarily by businesses.  The increased cost and complexity of Chapter 11 bankruptcy makes it undesirable for most people.

Chapter 13 bankruptcy is the most common type of “reorganization” bankruptcy for consumers.  In order to file for Chapter 13, a person must have a reliable source of income that s/he can use to repay some portion of the debt.  Thus, it is also known as “wage earner” bankruptcy.

Reaffirmation is a procedure by which a person agrees to pay a debt that would otherwise be discharged in bankruptcy.  The process of transforming a “Chapter 7” petition for bankruptcy relief into a “Chapter 13” filing, or vice versa is called “Conversion”.  However, the debtor is not permitted to keep switching back and forth between chapters.  Creditors may petition a court to have a debtor declared insolvent under rare circumstances.  If the court grants relief, this is termed an “involuntary bankruptcy”, as the bankruptcy occurs without the debtor’s consent.  The cost of bankruptcy will vary depending upon the complexity of the case and the type of bankruptcy filed.  A court may refuse to grant bankruptcy in certain situations such as:

  • The debtor failed to adequately explain the loss of assets;
  • The debtor committed perjury during the course of the bankruptcy;
  • The debtor failed to obey the lawful orders of the bankruptcy court;
  • The debtor fraudulently transferred, concealed, or destroyed property that should have been included in the estate.

Inside Bankruptcy Overview