Although bankruptcy filings in the United States dropped sharply following the passage of new bankruptcy laws in 2005, the recent economic downturn has seen an increase in the number of people seeking debt relief through bankruptcy. According to Stephen P. Parsons, author of The ABCs of Debt, the number of new bankruptcy filings in the U.S. has been rising since 2007.
Debt relief in bankruptcy varies depending on the type of bankruptcy the debtor files, and on whether the debtor files as an individual or as a business. Most bankruptcies filed in U.S. courts are filed under Chapter 7, Chapter 11 or Chapter 13 of the U.S. Bankruptcy Code.
Going Bankrupt under Chapter 7
Chapter 7 bankruptcy is typically used for personal bankruptcy. As Parsons explains, Chapter 7 bankruptcy is a liquidation proceeding involving the sale of all the debtor's nonexempt property. The proceeds from the sale are then distributed to creditors in exchange for the discharge of the debtor's unpaid debt. The debtor gives up all of his or her nonexempt property, but receives a permanent discharge from future liability for most of his or her debts.
The new bankruptcy laws require that the debtor filing for Chapter 7 bankruptcy meet the bankruptcy means test. Parsons notes that the bankruptcy means test is used to determine whether the debtor has adequate disposable income to enable him or her to repay some of the debts. If the debtor has sufficient means to repay some of the debt, the Chapter 7 bankruptcy will be converted to a Chapter 13 bankruptcy.
Chapter 11 Bankruptcy: Business Reorganization
Chapter 11 bankruptcy is a reorganization proceeding designed for businesses. The goal is to keep the business alive. Reorganization involves the rearrangement of the debtor's finances under a court approved plan, according to Parsons. The reorganization plan will restructure the debts as well as some of the assets of the business and provide for repayment of some or all of the debts out of the future income of the business.
Chapter 13 Bankruptcy: Reorganization for Individuals with Income
Chapter 13 bankruptcy is a reorganization proceeding similar to Chapter 11, but designed for an individual with a regular income. The debtor who does not pass the means test for Chapter 7 bankruptcy must submit a Chapter 13 plan for using future income to pay off all or some of his or her debts. In exchange, the debtor is able to keep his or her nonexempt property.
Bankruptcy Attorneys
The type of bankruptcy one files will depend on whether one files as an individual or as a business and on the type of assets and income one has. Bankruptcy in the U.S. is governed by the Bankruptcy Code and the Federal Rules of Bankruptcy Procedure. There are Official Bankruptcy Forms that must be used in all bankruptcy proceedings. Because of the complexities involved in filing for bankruptcy, one who is considering going bankrupt should seek the assistance of an experienced bankruptcy attorney.
Additional Resources: Ways to Avoid Bankruptcy
Source: Parsons, Stephen P. The ABCs of Debt. N.Y.: Aspen, 2009.
Jessie Vanwinkle - Jessie Vanwinkle is an attorney in practice since 1998. View her full profile for more information.
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