Bankruptcy is a specific and unique type of federal court process designed to help individuals and businesses when they become overwhelmed by debt. Different chapters of the Bankruptcy Code (Chapters 7, 11, and 13, primarily) provide different types of solutions, which can involve liquidation of assets, reorganization of and payment plans for debts, or the discharge of certain obligations.

While filing for bankruptcy is often necessary and beneficial, it is not a choice to be made lightly. A bankruptcy will appear on your credit score for ten years. Even individuals with good credit scores can expect their scores to drop at least 100 points or more. But if you already have a low score, filing for bankruptcy won’t have much of an impact. Additionally, bankruptcy may make it more challenging to earn credit moving forward, and filing for bankruptcy again in the future may be more difficult.

The primary difference between a Chapter 7 bankruptcy and a proceeding under Chapter 13 is that the former involves liquidation while the latter focuses on reorganization pursuant to a payment plan.

In a Chapter 7 bankruptcy, the debtor will ultimately be relieved (“discharged”) from paying many of the common unsecured consumer or household debts that contributed to their current situation, such as:

Not all debts are discharged in a Chapter 7 proceeding, however. Student loans, child support payments, and certain tax debts will remain the debtor’s responsibility after their case ends. Additionally, the bankruptcy trustee in a Chapter 7 proceeding will be able to sell a debtor’s nonexempt property to repay creditors.

In a Chapter 13 bankruptcy proceeding, the bankruptcy court and trustee, in conjunction with the debtor and their bankruptcy attorney, craft a debt consolidation and repayment program. Typically, this plan establishes a schedule for the repayment of debts over a three to five-year period.

Once the plan is accepted, the debtor makes an agreed-upon monthly payment to the court-appointed trustee who will then divide that payment between creditors. The monthly payment amount is correlated to the amount of disposable income the debtor has after paying for their basic and necessary expenses.

These necessary expenses can include mortgage payments as well as amounts due under a car loan. By agreeing to continue making monthly payments and pay any arrearages on such secured assets, the debtor can keep them, allowing them to remain in their home and keep other important property so long they stay current.

Chapter 7 bankruptcy may be used by companies that want to liquidate and terminate their business. The bankruptcy court appoints a trustee to liquidate (sell) the company’s assets and uses the money to pay off its debt. If the business is a sole-proprietorship, then the owner is eligible to receive a discharge of their business and non-business debts.

In a Chapter 7 proceeding, a debtor may restructure its secured debt payments, reject burdensome leases, pay tax obligations over time, and relinquish unneeded assets.

In a Chapter 11 bankruptcy proceeding, the court appoints a trustee to operate the debtor’s business. However, in most cases, the business owner will act as the trustee as a “debtor in possession,” continuing to operate their business under the bankruptcy judge’s protection and supervision.

There will still be a U.S. trustee responsible for monitoring the progress of the case and overseeing its administration. The court may also appoint a committee of secured creditors that can and will, among other things:

• consult with the debtor in possession about the administration of the case
• investigate the debtor’s conduct and operation of the business
• participate in formulating a plan of reorganization

Debtors in Chapter 11 have the exclusive right to propose a plan of reorganization for a period of time (in most cases, 120 days). After that time, creditors may also submit their own plans. If a plan cannot be confirmed, the court may either convert the case to a Chapter 7 liquidation or, if in the creditors and the estate’s best interests, the court may dismiss the case, returning the debtor to the status quo before bankruptcy. If the court dismisses the case, creditors will be able to pursue their claims under non-bankruptcy law.

The means test is an evaluation used by courts in bankruptcy cases to determine if an individual’s income will allow one to file under Chapter 7. It assesses eligibility by subtracting specific monthly expenses from the debtor’s average income over a six-month period. The higher the number is, the less likely the debtor is to be eligible for a Chapter 7 bankruptcy.

Yes, but there is a time limit on the discharges you can receive. That limit depends on which type of bankruptcy you previously filed and which type of bankruptcy you are looking to file now.

Most likely. Approximately 30 to 40 days after filing your bankruptcy petition, you will have to attend a First Meeting of Creditors led by your court-appointed bankruptcy trustee.

At that meeting, the trustee will ask you questions (under oath) about your bankruptcy papers, your assets, debts, and other matters. Creditors will also be allowed to ask you questions.

If you file under Chapter 7, you normally do not need to return to court. If you filed a Chapter 13 proceeding, you will need to return to court for a confirmation hearing before the bankruptcy judge.

Before filing for bankruptcy, you will need to gather the following documents and information to share with your bankruptcy lawyer and the court:

• Tax returns for the previous two years
• Proof of income via pay stubs, W-2s, a profit and loss statement, and documentation for Social Security benefits, disability payments, and rental income.
• An assessment of real estate you own along with mortgage statements, deeds of trust, and proof of homeowners insurance.
• Vehicle registration, proof of insurance, and valuation.
• Recent bank and retirement account statements.
• Valid photo ID.
• Proof of your social security number.
• Proof of any spousal maintenance or child support payments and obligations.

Your bankruptcy lawyer can advise you of any additional documents or information they need.