Common questions and concerns about bankruptcy protection

Common questions and concerns about bankruptcy protection

Even though filing for bankruptcy has become much more common in recent years, and the once-prevalent "stigma" around bankruptcy has significantly decreased, the process is still a mystery to many people. Some of the terminology associated with bankruptcy - like "Chapter 7," "Chapter 13," "discharge" or "liquidation" - are part of the vernacular now, but there questions abound about the process.

Getting started

Perhaps the most frequently asked question about bankruptcy is: "What is bankruptcy?" Though there are myriad differences between the various bankruptcy provisions, they are all a way to discharge debt and give the filer an opportunity for a fresh financial start.

Bankruptcy protection is a legal way by which debt is managed under the supervision of a bankruptcy court and an appointed trustee. It is available to most individuals and businesses under one of the following chapters of the U.S. Bankruptcy Code:

  • Chapter 7 - a Chapter 7 bankruptcy discharge will result in eliminating many or all unsecured debts (including credit card debt, medical bills, utility bills and any other type of credit that was extended without a collateral requirement). Chapter 7 is also known as "liquidation" bankruptcy, in which a bankruptcy trustee can sell noon-exempt assets and use the proceeds to pay creditors. Most property owned by Chapter 7 debtors is either exempt or essentially worthless for purposes of raising money for creditors, so few debtors have to actually surrender any personal property. Alternatively, debtors could file a Chapter 13 repayment plan instead in which they keep their non-exempt assets and repay the equivalent value of the non-exempt assets over three to five years.
  • Chapter 11 - also known as "reorganization" bankruptcy, and most often used by businesses that want to remain in business while the proceedings are pending
  • Chapter 12 - for family farms
  • Chapter 13 - also known as "repayment" bankruptcy, and involves consolidating debts into one monthly payment that will continue for three to five years, after which remaining eligible debt is discharged/forgiven

Many people also wonder about the filing itself, namely how it is done. A bankruptcy filing involves the submission of tedious and exacting forms about debt, creditors, assets and income to the governing federal bankruptcy court. Filers will need to be forthright about their financial situation and follow the instructions set forth by the court, including participating in mandatory credit counseling/education to help prevent the need for future intervention.

It is possible for individuals to file for bankruptcy without an attorney, but it is such a technical process that the federal court system itself recommends not going it alone, since making even the smallest error could result in the bankruptcy being dismissed or the loss of vital debt relief.

Other concerns

Many people who are interested in bankruptcy have misconceptions about the types of debts that are dischargeable, assuming that any debt they have, regardless of the source, can be wiped out with a bankruptcy filing. While it is true that bankruptcy is an important debt management tool, it is not a "cure-all," and it does have limitations. For example, there are certain types of debts that generally will not be forgiven in a bankruptcy filing, including:

  • Most state and federal tax debt, including penalties and interest
  • Student loans - there have been several legislative measures introduced that would allow the discharge of student loans in situations of "undue hardship," but nothing has yet been passed
  • Alimony (also known as "spousal support" or "spousal maintenance"), regardless of whether it is a number of small payments spread out over time or a lump sum
  • Child support

Learning more

If you are considering filing for bankruptcy, it is always a good idea to seek the advice of an experienced bankruptcy attorney or financial planner; every person's financial situation is unique, so there is no "one size fits all" solution to unmanageable debt. Some people might benefit from a debt consolidation plan or mortgage modification in lieu of bankruptcy, while others' best choice is a Chapter 7 or Chapter 13 filing. A skilled professional can help you determine which debt management path is best for you.