Bankruptcy FAQs

Both individuals and businesses are allowed to file for Chapter 7 bankruptcy. When an individual files such a bankruptcy, it is referred to as a consumer Chapter 7 bankruptcy. When a business files a Chapter 7 Bankruptcy case, essentially for liquidation, it is referred to as a business Chapter 7 Bankruptcy. These bankruptcy cases will typically last between three and six months, with more complicated ones spanning from six to 12 months or longer. A Chapter 7 Bankruptcy is commonly referred to as a "straight bankruptcy." Upon filing the bankruptcy with the court, an automatic stay immediately goes into effect, ceasing all collection activities, thus providing an opportunity for the filer to catch their breath. Upon entry of the Discharge (the order from the court relieving the filer of all obligations and liabilities on debts listed in their schedules), the filer obtains a "fresh start." The Discharge allows the filer to begin anew, having eliminated most, if not all, of their debt, retaining their exempt property, and starting over.

Before you can file for Chapter 7 bankruptcy, you must show that you are eligible to file for the protection offered by Chapter 7. The eligibility to file such a case hinges on the type of debt you owe, such as consumer debt or business debt, and also on your monthly household income based upon a six-month look back.

Chapter 13 bankruptcy protection is designed for individuals with regular income who are temporarily unable to pay their debts and would like to pay them in installments over some time. You are eligible for Chapter 13 if your secured and unsecured debts do not exceed specific dollar amounts outlined in the Bankruptcy Code. You must file a Plan with the Court explaining how you propose to repay your creditors all or part of the money you owe them, using your future earnings. Usually, the period allowed by the court to repay your debts in five years but no less than three years. You may keep all your property, both exempt and non-exempt, as long as you continue to make payments under the Plan.

Chapter 11 bankruptcy is usually a proceeding for the reorganization of a debtor engaged in business. Under some circumstances, it is available to consumers as well. Under Chapter 11, the debtor is typically a business seeking to reorganize its debts to enable the struggling company to continue operating into the future.

Chapter 12 bankruptcy is a separate bankruptcy code section that explicitly provides debt restructuring for family farms and fishers. Chapter 12 allows family farms to reduce the debt load and restructure debt so that the farm may become viable in the future. Both persons and business entities engaged in a farming operation are eligible for Chapter 12 bankruptcy protection.

If you file for Chapter 7 bankruptcy, your nonexempt assets will be liquidated to repay your creditors. Nonexempt assets are things such as vacation homes, family heirlooms, investments outside of retirement accounts, and valuable artwork. Exempt assets are things such as furniture, health aids, retirement accounts, and the family vehicle. 

When you file for bankruptcy, an automatic stay immediately goes into effect. An automatic stay is a court order that bans your creditors from attempting to collect your debt. You do not need to make payments after the automatic stay goes into effect, and you can potentially sue your creditors for harassment. Debt collection attempts that are not suspended by the automatic stay are child and spousal support.

While bankruptcy filings are public record, it is rare for parties outside a case to seek such information. Therefore, only you, the court, and anyone you inform of your bankruptcy will know about your case.

You will be able to rent, however it can be difficult to have a lease application accepted if you have bad credit and a bankruptcy case on your credit history. In some cases, using bankruptcy to reduce your personal debt can help you secure a lease, as removing your debt can make you appear to be a better credit risk than other applicants.

Yes, you are actually encouraged to seek new credit after you file for bankruptcy in order to rebuild your credit score. Certain financial institutions specifically seek individuals who have filed for bankruptcy to offer them credit.

There are six different types of bankruptcy, known by their chapters in the Bankruptcy Code. All types provide for permanent relief from certain debts. Most debtors file for bankruptcy under Chapters 7, 11, and 13.

Chapter 7 provides for liquidation of the debtor's non-exempt assets. A court-appointed trustee conducts the sale of debtor's non-exempt assets and distributes the proceeds to creditors. Both individuals and businesses may file for bankruptcy under Chapter 7.

Chapter 9 provides for the reorganization of municipalities (which includes cities, towns, villages, taxing districts, municipal utilities, and school districts).

Chapter 11 is typically relied upon by partnerships and corporations. It provides for a supervised reorganization of a business, and allows the debtor to maintain the business while implementing a payment plan confirmed by the court.

Chapter 12 is applicable to family farmers and fisherman.

Chapter 13 provides for bankruptcy of an individual with a regular income, which is used to make a payment plan to pay debts, usually within three to five years.

Chapter 15 applies to cross-border bankruptcies. It adopts and implements the United Nations' Model Law on Cross Border Insolvency.

The type of bankruptcy you file and the form of your business determines the impact of bankruptcy on your business. Only individuals can file Chapter 13, so it can be used to reorganize the personal and business debts of a sole proprietor, but it will not affect a corporation, partnership, or limited liability company. A business will file under Chapter 7 or Chapter 11.

Filing a Chapter 7 bankruptcy can wipe out your sole proprietorship's debts because it is not a separate legal entity from you. The business assets will be listed in the bankruptcy because they are your personal assets as well. A bankruptcy trustee will use the assets of a sole proprietorship to pay creditors back to the greatest possible extent. However, if you file a Chapter 7 bankruptcy there will be no impact to your business if it is organized as a partnership, corporation, or limited liability.

Chapter 11 bankruptcy is a business reorganization bankruptcy that allows your business to continue operating while reorganizing the debts according to a debt repayment plan. It is complicated, expensive, and appropriate for business owners who are trying to rebuild their businesses and plan for the future. There are expedited proceedings available for small business debtors who are trying to restructure the business, but you only have 300 days to propose a plan to repay creditors.

Most consumer debt can be eliminated through a bankruptcy discharge. If you forget to include a debt in the paperwork, however, it will not be discharged. Additionally, creditors have the opportunity to object to the discharge of any debt. There are 19 categories of debts that are considered "non-dischargeable”.

Some debts considered non-dischargeable can nevertheless be discharged if a creditor does not challenge your effort to get them discharged. Student loans are only discharged if you are able to convince the court that repaying the debt is an undue hardship for you.

Filing for bankruptcy triggers an automatic stay, which requires creditors to stop their collection efforts, including efforts to foreclose on or repossess property. Whether the bankruptcy fully stops foreclosure or repossession, or merely delays these events, depends on the type of bankruptcy you file.

Filing for Chapter 7 bankruptcy allows you to stall a foreclosure sale for 3-4 months, which can provide you time to negotiate with a lender to change the loan period or loan terms of the mortgage. However, a lender may move to lift the stay. Filing for Chapter 13 can stop the sale and allow you to propose a debt repayment plan that will cover arrearages as well as mortgage payments that come due during bankruptcy. As long as the plan is approved and you make timely payments on this plan over the 3-5 years of bankruptcy, you can avoid foreclosure altogether.

A Chapter 7 automatic stay stops a lender from repossessing your car, but the lender can and probably will ask the court to lift the stay, unless you show that you are going to catch up on car payments or cure a default. The lender will need to show the court that its interests are inadequately protected because you have failed to make timely payments on the loan or you are in default. Most times, if you cannot afford to catch up on car payments or cure your default, the court will lift the stay and will not stop a lender from repossessing your vehicle.

However, you should be able to stop a repossession altogether if you adequately address arrearages and upcoming car loan payments in your Chapter 13 debt repayment plan. To keep your vehicle, you will also need to make adequate protection payments from the date your file for bankruptcy until the date the judge approves the plan.

Filing for Chapter 7 or Chapter 13 bankruptcy initiates an automatic stay, which mandates that most creditors cease all collection activities. With an automatic stay in place, creditors and collection agencies must stop contacting you by phone and mail, and cannot file or maintain lawsuits against you to recover most outstanding debts. As well, they are prohibited from filing liens against you or garnishing your wages.

The automatic stay can also temporarily stop foreclosure proceedings, utility shut-offs, and evictions. The stay will likely not apply to the collection of child support or alimony, and certain IRS matters. Creditors may also ask the court to lift the stay in some cases.