Bankruptcy
Definition
Bankruptcy is the legal status of a person or business that cannot repay the debts it owes to creditors. This legal proceeding is initiated by the debtor and carried out through court action, potentially leading to the discharge or reorganization of debt. Bankruptcy laws in the United States and other countries provide for different types involving liquidation (Chapter 7), reorganization (Chapter 13), and other specialized proceedings.
Examples
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Liquidation (Chapter 7 Bankruptcy): A retail company unable to pay its bills files for Chapter 7 bankruptcy. The company’s assets are sold to pay off creditors, and any remaining debt is typically discharged.
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Reorganization (Chapter 13 Bankruptcy): A homeowner with overwhelming credit card debt files for Chapter 13 bankruptcy, allowing them to keep their home while reorganizing their debt and creating a plan to repay creditors over the next three to five years.
Frequently Asked Questions
What happens when I file for bankruptcy?
- When you file for bankruptcy, certain actions are taken by the court to address your debts. A trustee is appointed to evaluate your financial situation and your assets may be liquidated or your debts reorganized depending on the type of bankruptcy filed.
Can all debts be discharged in bankruptcy?
- No, some debts like student loans, most taxes, alimony, and child support are generally non-dischargeable.
How does filing for bankruptcy affect my credit score?
- Filing for bankruptcy can significantly impact your credit score, often lowering it and remaining on your credit report for up to ten years.
Who can file for bankruptcy?
- Both individuals and businesses can file for bankruptcy if they meet the legal criteria set forth under the law.
What property can I keep after filing for bankruptcy?
- Exemptions vary by state, but often include necessary items like clothing, household goods, and in some cases, a vehicle or home.
Related Terms
- Chapter 7 Bankruptcy: A type of bankruptcy involving the liquidation of assets to repay creditors.
- Chapter 13 Bankruptcy: A type of bankruptcy allowing individuals to reorganize their finances and create a repayment plan.
- Insolvency: The inability to pay debts when they are due.
- Debtor: An individual or business that owes money to creditors.
- Creditor: An individual or business that a debtor owes money to.
Online Resources
- U.S. Courts - Bankruptcy Basics
- National Consumer Law Center: Bankruptcy
- Bankruptcy Data - Industry News and Resources
References
- U.S. Code Chapter 11 (Bankruptcy Code)
- Local state bankruptcy exemption statutes
Suggested Books for Further Studies
- “The New Bankruptcy: Will It Work for You?” by Stephen Elias
- “Bankruptcy for Small Business Owners: How to File for Chapter 7” by Stephen Elias and Bethany K. Laurence
- “The Bankruptcy Lifeline: What Your Creditors Don’t Want You to Know” by Wayne M. Greenwald
Real Estate Basics: Bankruptcy Fundamentals Quiz
### Can filing for bankruptcy provide a fresh start for debtors?
- [x] Yes, it allows debtors to eliminate or repay debts under the protection of the court.
- [ ] No, it worsens the financial situation.
- [ ] Yes, but only for businesses.
- [ ] No, it has no effect on debt repayment.
> **Explanation:** Filing for bankruptcy can provide debt relief by either eliminating or reorganizing debts, offering a fresh start under court protection.
### What is typically the first step in the bankruptcy process?
- [x] Filing a petition with the bankruptcy court
- [ ] Selling off personal assets
- [ ] Repaying all debts
- [ ] Contacting creditors directly
> **Explanation:** The bankruptcy process usually begins with the filing of a petition with the bankruptcy court.
### Which type of bankruptcy involves the liquidation of assets?
- [x] Chapter 7 Bankruptcy
- [ ] Chapter 13 Bankruptcy
- [ ] Chapter 11 Bankruptcy
- [ ] Chapter 12 Bankruptcy
> **Explanation:** Chapter 7 Bankruptcy involves the liquidation of a debtor's non-exempt assets to pay off as much debt as possible.
### How long does a Chapter 13 repayment plan last?
- [ ] 2-3 years
- [x] 3-5 years
- [ ] 6-8 years
- [ ] 10 years
> **Explanation:** In Chapter 13 bankruptcy, the debtor's repayment plan lasts for 3-5 years.
### Are student loans typically discharged in bankruptcy?
- [x] No, they are generally not dischargeable.
- [ ] Yes, they can always be discharged.
- [ ] Only if approved by the court.
- [ ] It varies on a case-by-case basis.
> **Explanation:** Student loans are generally non-dischargeable in bankruptcy except in cases of undue hardship, which is very difficult to prove.
### What role does a trustee play in bankruptcy?
- [x] Oversee the debtor’s case and administer via liquidation or reorganization
- [ ] Provide legal representation to the debtor
- [ ] Lend money to the debtor
- [ ] None of the above
> **Explanation:** The trustee oversees the bankruptcy case, manages liquidation in Chapter 7, and helps set up a repayment plan in Chapter 13.
### What is the maximum duration that bankruptcy remains on a credit report?
- [ ] 5 years
- [ ] 7 years
- [ ] 8 years
- [x] 10 years
> **Explanation:** A bankruptcy can stay on a credit report for up to 10 years from the date of filing.
### Is personal property always subject to liquidation in bankruptcy?
- [x] No, exempt property protected by state law is often retained by the debtor.
- [ ] Yes, all personal property is sold.
- [ ] Exemptions do not apply in any bankruptcy case.
- [ ] None of the above
> **Explanation:** Certain properties may be exempt from liquidation depending on state laws, which means the debtor can often keep necessities like basic household items and tools of their trade.
### Who files for voluntary bankruptcy?
- [x] The debtor
- [ ] The creditor
- [ ] The trustee
- [ ] The federal government
> **Explanation:** The debtor files for voluntary bankruptcy by submitting a petition to the bankruptcy court.
### What type of bankruptcy is sometimes referred to as a "wage earner's plan"?
- [ ] Chapter 7 Bankruptcy
- [x] Chapter 13 Bankruptcy
- [ ] Chapter 11 Bankruptcy
- [ ] Chapter 12 Bankruptcy
> **Explanation:** Chapter 13 Bankruptcy is often called a "wage earner's plan" because it allows individuals with regular income to develop a plan to repay all or part of their debts from future earnings.
