I started out to write one long post about bankruptcy when I realized there’s just too much information to write one post. So, I’ll be breaking this up over several posts. This post will give you the basics of bankruptcy: what it is, when to file, and the different chapters available. Future posts will delve into specifics with greater detail.

What is bankruptcy?

Bankruptcy is a legal proceeding in which people who are struggling to pay their debts can get a fresh financial start.

Now, it’s important to clarify here that there are several different types of bankruptcies; however, none of them will wipe the slate entirely clean without you having to give up some assets, like your home or car. Since the point of most bankruptcies is to try and keep your assets if you can, understand that not all of your debts will be wiped out.

What can bankruptcy do for me?

Here’s a brief overview of what bankruptcy MAY be able to do for you:

• Eliminate legal obligation to pay most of your debts

• Stop foreclosure and allow you to catch up on your payments

• Prevent repossession of your car, and in some cases force creditors to give back an already repossessed car when you intend to make payments

• Stop certain forms of wage garnishment and debt collections harassment

• Restore or prevent termination of utility services

What bankruptcy can NOT do?

• Eliminate certain rights of “secured” creditors

• Eliminate child support, alimony, student loans, criminal fees, and/or taxes

• Protect cosigners

• Discharge debts that arise after a bankruptcy has been filed

Background Information

Bankruptcy in the U.S. is a federal matter and falls under the guidelines of the U.S. Constitution, which gives Congress the right to enact bankruptcy laws. The law governing bankruptcies is called the Bankruptcy Code, which is located in Title 11 of the United States Code. Federal law is amplified by state law, which means that in cases where federal law fails to speak or expressly defers to state law, the states will have final say over the case.

I just went through all of this in my Political Science class, so that’s why I know this. Since I do know it, though I thought I’d throw it in here. But, you can find a more detailed description and links to the various codes from Wikipedia. The important thing to take away from this is that bankruptcy does fall under federal jurisdiction, so any fraud with this becomes a federal crime.

In order for you to file bankruptcy, your request must first be approved by the U.S. Bankruptcy Court, which is an adjunct of the U.S. District Court in your area. But, since state law still plays a pretty important role in bankruptcy cases, it’s not likely that I can generalize the laws from state to state. In other words, what I know about bankruptcy in Texas will not be the same as in New Jersey in most cases.

Types of Bankruptcies Available

There are six types of bankruptcies currently available, but three are most common for individuals.

• Chapter 7: a basic liquidation of assets, used primarily by consumers, though businesses can choose this option as well.

• Chapter 9: municipal bankruptcy

• Chapter 11: the reorganization of debts; this one is primarily used by businesses, but it can be used by individuals who  have heavy amounts of debts and assets and do not want to liquidate those assets entirely

• Chapter 12: rehabilitation for family farmers and fishermen

• Chapter 13: establishes a repayment plan for individuals with a regular source of income

• Chapter 15: ancillary and other international cases

*In upcoming posts, the Chapters I will delve into with more detail will be Chapters 7, 11, and 13.

The most common types of personal bankruptcy are going to be Chapters 7 and 13. According to Wikipedia, as much as 65% of all U.S. consumer bankruptcy filings are Chapter 7 cases. I think that’s kind of sad myself as these people are liquidating their assets to do it, but it may be the only option they have.

When To File?

The question always comes up, when is a good time to file for bankruptcy? The honest answer is that you have to make the decision on your own. I recommend consulting an attorney – and while they’ve gotten a bad rap for costing a lot of money, the truth is, if you go the bankruptcy route, having an experienced attorney to navigate you through the red tape can save you thousands!

My suggestion is to sit down and take a look at your financial picture, really look. Draw up a repayment plan that is realistic and includes everything you have to repay and what your income looks like. If the repayment plan you’ve drawn up cannot get you out of debt, or you have no income to speak of, or if you’re on the brink of foreclosure, a bankruptcy may be an option to consider. But, understand that it should be a last resort and not a quick-fix solution. There are rules and you can be denied. If you’re denied, you have to wait 180 days to file a request again. That’s a long time, so it’s important to consider your options carefully.

* Please note that I am not an attorney, nor do I have all the answers for each situation. I offer suggestions based on my experiences in the banking industry and nothing more. For more detailed information and answers to specific questions, please consult an attorney.*

Ok, so there are the basics of bankruptcy. Don’t worry, though. I’ll being going into a lot of these things in more detail in upcoming posts, so if you found this post lacking in information, I know. I meant it to be. Lots of stuff on this topic and I didn’t want to overwhelm you in one post. Plus, now I get to ask you guys what questions you might want answered as I go through this series. Please refer to my above disclaimer, but if you have some questions, let me know and I’ll try to include them!

Related posts:

1. Bankruptcy: Chapter 7 Part I
2. Bankruptcy: Chapter 7 Part II
3. IRA Basics: Part 2
4. IRA Basics – Part 1
5. Auctioning Debt to the Highest Bidder?