Bankruptcy law is a catchall term that governs both personal and corporate bankruptcy. Both types of bankruptcy are legal processes that provide a person or company with certain legal protections while reorganizing or eliminating any debt owed. Hire an experienced bankruptcy attorney who specializes in the type of bankruptcy chapter you need in order to protect your assets.
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UPDATED: Aug 9, 2021
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- Bankruptcy law includes protections for both individual consumers and businesses
- Bankruptcy filings do not eliminate child support payments, IRS debts, or student loan debt
- Bankruptcy law is extremely complex and requires the guidance and support of a skilled bankruptcy attorney
Bankruptcy law is a broad area of the law that is broken down into two more specific areas: consumer bankruptcy and business bankruptcy. You have multiple options when fling for either type of bankruptcy, but each of these options has legal ramifications and should be chosen with the skilled guidance of an experienced bankruptcy attorney.
Bankruptcy cases almost exclusively fall under the purview of federal law, and cases and are filed in the U.S. Bankruptcy Court. Unfortunately, if you are facing IRS debt, bankruptcy law will not apply. You will have to hire a tax attorney to represent you in your tax dispute.
Keep reading to learn how bankruptcy law applies to your circumstances and speak to a local bankruptcy attorney for free. Enter your ZIP code above and find an affordable bankruptcy law firm near you to get started.
What is bankruptcy?
For both individuals and businesses, bankruptcy can be a way to clean the slate after circumstances made it impossible to pay back debts. But that does not mean bankruptcy is right for every situation every time.
Bankruptcy can cause more harm for consumers in cases where can negotiate with lenders. For example, if you have high credit card debt or a medical bill that can be negotiated into a fair monthly payment, then bankruptcy might not be your best option.
However, if you have recently suffered a job loss or catastrophic injury that you cannot repay, bankruptcy might be something to consider. In fact, two-thirds of all bankruptcies filed each year in the U.S. result from astronomical medical expenses. You are not alone, and consumer bankruptcy protection may help you get through a difficult financial time.
For businesses, bankruptcy protection provides companies with the same options for resolving debt while continuing to operate post-bankruptcy. This can help a business limit its exposure and liability and give it time to get back on its financial feet. But just like consumer bankruptcy, business bankruptcy is not for every company. If you can negotiate a fair payment plan for your business debt, you can avoid filing for bankruptcy.
Ultimately, for consumers and businesses alike, bankruptcy can provide a fresh start. This gives the individual or the business a chance to recover financially while providing certain protections during the bankruptcy proceeding. Scroll down to learn what types of financial protections apply when you declare bankruptcy.
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What happens when you declare bankruptcy?
The biggest benefit to bankruptcy protection is that it stops creditors in their tracks. No more harassing phone calls. No more wage garnishments. No more concerns about your business operations.
Consumer bankruptcy can also pause or eliminate:
- Credit card debt
- Medical debt
- Utility debt
- Personal loans
- Most unsecured debt
Can you keep your house after filing for bankruptcy? That depends on how your bankruptcy proceedings approach secured debt. Secured debt can be eliminated, but you may need to give up that property. If you cannot pay your mortgage, for example, you may lose your house in order to eliminate that debt.
Depending on the bankruptcy protection you file, you may be able to move through the process quickly. In a slower process, however, you may be able to retain more of your assets.
Bankruptcy cannot fix everything. No bankruptcy protection can eliminate child support, student loans, or tax debts.
Bankruptcy also cannot prevent a creditor from taking back secured property. For example, if your business purchased a fleet of vehicles, the dealership or bank may have retained the title until you paid off the loans on the vehicles. That is a secured debt and, if you cannot make the payments on that debt, the bank or dealership may repossess those vehicles.
What happens to your credit score after you file for bankruptcy?
Bankruptcy remains on your credit report for several years. While you can make purchases and create a better credit history right after the bankruptcy proceedings end, many banks are hesitant to offer large loans to individuals with a bankruptcy on their credit report. This can prevent you from buying a new home, vehicle, or from acquiring loans to start or support your business.
However, right after your bankruptcy is discharged or finalized, you can start rebuilding your credit. Many consumers find that as soon as two years after bankruptcy, they can get approved for a home loan or credit card. But be careful and take your time. Anticipate higher interest rates and larger down payments, and you may want to consider getting a secured credit card that limits your spending more closely, especially if you have had trouble with this in the past.
What are the different types of consumer bankruptcy?
Individuals have several options for bankruptcy, including Chapter 7 and Chapter 13 consumer bankruptcy. Once you decide that bankruptcy is your way out of financial hardship, you need to work with a bankruptcy attorney to help you decide which path is best for you and your specific situation.
When deciding what type of consumer bankruptcy to file, you must have a clear financial goal in mind. Some bankruptcy paths allow for the restructuring of debt where it can be repaid over time with monthly payments. Other bankruptcy options allow for the complete eradication of the debt.
This can be a daunting task and it is difficult to understand all of the ramifications of every bankruptcy option. We discuss the differences between bankruptcy chapters below, but speaking with a trusted bankruptcy lawyer can help you make the right choice for your specific situation.
Chapter 7 Consumer Bankruptcy
When most people think of consumer bankruptcy law, Chapter 7 bankruptcy is what comes to mind. It is the most popular type of bankruptcy as it is usually quick and eliminates all debt.
Not every person will qualify for Chapter 7 bankruptcy protection. Here are the basic requirements:
- Your income must be lower than your state’s median income
- You must not have filed bankruptcy in the last six to eight years
- You must have lived in your state of residence for a certain amount of time
If you qualify, Chapter 7 bankruptcy can go from initial filing to discharge in about six months. This makes it an attractive option, even with a several hundred dollar filing fee.
How do you file a Chapter 7 bankruptcy?
Your bankruptcy officially begins when you file a petition for bankruptcy along with other forms. You will need to provide the bankruptcy court with the following information:
- Real property you own
- Current income
- Monthly expenses
- All property and items purchased, sold, or given away in the last two years
You will also need to list property that you think the bankruptcy court does not have jurisdiction over, called exempt property. This might include your home, a vehicle, certain clothing, household items, and government benefits payments. Your bankruptcy lawyer can help you determine what exempt property you might have.
As soon as the bankruptcy court receives your filing, an automatic stay immediately goes into effect. An automatic stay stops creditors from attempting to collect the debt you owe. This includes a prohibition against the harassing phone calls you may receive as well as an immediate pause on any wage garnishments that they may have against your paycheck.
Under Chapter 7 bankruptcy, the court takes control of your property. You cannot sell or give away any property without the court’s consent, except for the exempt property. If the person appointed by the court to oversee your bankruptcy proceedings, known as the bankruptcy trustee, determines that you have non-exempt property, they may require that you sell the property to pay off portions of your debt.
Once the bankruptcy proceedings are complete, your debt is discharged, meaning you now have a clean slate and no more debts.
Chapter 13 Consumer Bankruptcy
Chapter 13 bankruptcy provides a way for consumers to restructure their debt. Instead of wiping out all debt after bankruptcy, Chapter 13 allows consumers to keep their property and create a repayment plan that works to pay off debts over the course of several years.
Businesses are not allowed to file Chapter 13 bankruptcies, and not every consumer is eligible for Chapter 13. Certain requirements apply, including:
- Debts cannot exceed a certain amount
- You must have steady income
- Your income must be high enough to support your basic needs and a repayment plan
If you’re not sure if you qualify for Chapter 7 vs. Chapter 13 bankruptcy, speak with a bankruptcy lawyer right away. They can help you better understand your financial situation and determine which proceeding will best fit your needs.
How do you file a Chapter 13 bankruptcy?
When you file your petition for bankruptcy and pay the filing fee, you must attend credit counseling and present a certificate of completion to the bankruptcy trustee assigned to your case before you propose a repayment plan.
You and your lawyer will then present your repayment plan to creditors and the court. This plan must include all of the debts you owe, but you will most likely end up paying less than you owe to each creditor.
The bankruptcy trustee will review the plan and reject it if they do not think it is fair to the creditors. The bankruptcy court must also confirm the repayment plan at a hearing, and your creditors will have an opportunity to object to the plan.
Approval of your Chapter 13 repayment plan is not dependent on your ability to repay each debt in full but rather to repay a fair amount.
If you submit a plan that the bankruptcy trustee approves, then you move forward in the process. After your plan is confirmed, you will make monthly payments for three to five years. At the expiration of that time, your debts will be wiped out.
Over this time, however, your financial situation might likely change. Do not ignore this or try to hide it. If you can continue to make payments, do so because you can always ask the court to change your plan. If you can show that you have suffered a reduction in pay, the court may approve a lower monthly payment with no penalty to you.
After you have successfully made monthly payments according to your repayment schedule for the time required, you will go to court one last time. You will show the judge that you have made all of your payments and they will discharge your qualified debts.
What are the different types of business bankruptcy?
Business bankruptcies come in many forms, just like consumer bankruptcy. If your business, no matter the size, is having trouble paying its debts, bankruptcy might be an option for you. Working with an experienced business bankruptcy attorney can help you decide which path is best for you.
Chapter 7 Business Bankruptcy
Chapter 7 bankruptcy for businesses can be a good option for very small companies and those who want to close. It’s not usually beneficial for larger companies to go through Chapter 7 bankruptcy. It can actually increase liability for owners if they don’t receive a full discharge of their debts. However, for businesses that do not want to continue operating after bankruptcy, this might be an option.
Can you file Chapter 7 bankruptcy on a sole proprietorship?
For sole proprietors, if you have not created a formal structure, you and your business are essentially treated as the same. In this case, Chapter 7 business bankruptcy works similarly to Chapter 7 consumer bankruptcy because your debts are your company’s debts, and you can protect certain assets and exempt them from creditors.
Can you file Chapter 7 bankruptcy on a partnership?
When a partnership files for Chapter 7 bankruptcy, the business debts are not discharged and partners cannot exempt property. Instead, the bankruptcy trustee will close and liquidate all assets of the business and pay creditors.
If the sale of the business assets is not enough to cover all debts, the partners may end up being liable for any debts owed by the company. Creditors could go after individual partners so it might be better for partners to file Chapter 7 consumer bankruptcy after closing the business to protect their assets.
Can you file Chapter 7 bankruptcy on a corporation?
Filing Chapter 7 for a corporation has similar risks to a partnership. The bankruptcy trustee assumes responsibility for selling all assets of the business but officers and other executives may be personally liable for the debts, especially if they co-signed or personally guaranteed debt.
Again, if the corporation has no intention of operating after the bankruptcy, then the owners might be better off selling assets themselves and then filing consumer bankruptcy after the business closes.
Can you file Chapter 7 bankruptcy on a limited liability company (LLC)?
A limited liability company (LLC) works similarly to a corporation. You can liquidate all of the LLC’s assets and try to pay down debts. But if you do not have enough or you just want to close the business, it might be better to file for consumer bankruptcy protection later.
Chapter 11 Business Bankruptcy
Chapter 11 bankruptcy can be an option for businesses that are struggling financially but want to continue operating. You often see Chapter 11 discussions in the news when large corporations file for bankruptcy protection. But it’s not just large companies that can benefit from Chapter 11 — small businesses can, too.
How do you file a Chapter 11 bankruptcy?
Once you decide that Chapter 11 bankruptcy is right for your business, you work with your lawyer to file a bankruptcy petition. The time it takes for Chapter 11 to progress depends a great deal on your specific circumstances. Generally, you can assume your case will go from petition to close in six months to two years.
Under Chapter 11, an automatic stay happens as soon as the bankruptcy petition is filed. This stops creditors from demanding payment or otherwise taking steps to collect on the debt. This gives companies time to reorganize and prioritize their finances to keep operating.
Unlike other bankruptcy options, under Chapter 11 businesses retain control over their operations and assets, not the bankruptcy trustee.
Much like Chapter 13 consumer bankruptcy, Chapter 11 business bankruptcy requires a repayment plan for the creditors to be reimbursed at least a portion of the debt they are owed. The payment plan will include the amounts owed and to what creditors, along with monthly payment amounts.
Under most payment plans, the company must downsize or restructure in some way to free up assets to make the payments. Upon completion of all payments, the remaining debt is discharged, and the company returns to normal operations.
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How can I hire a bankruptcy lawyer?
Filing bankruptcy is a very personal choice, whether you are considering consumer bankruptcy or business bankruptcy. The good news is that you have many options available to you no matter which bankruptcy proceeding you choose.
There are pros and cons to each type of bankruptcy, and every bankruptcy path has complex legal requirements that are best served with support and guidance from a skilled bankruptcy attorney who specializes in the type of bankruptcy you are looking to file.
To help you protect your assets and choose the right bankruptcy law firm for your needs, use our free legal tool to find an experienced bankruptcy attorney in your area. Enter your ZIP code now to get started.