Bankruptcy Information: Chapter 7 vs. Chapter 13 bankruptcy. Find out what you need to know before declaring bankruptcy.
Bankruptcy Best
Understanding U.S. Federal Bankruptcy Law
Introduction
Bankruptcy is a federal legal process designed to help individuals and businesses get a “fresh financial start” when debts become unmanageable. This process is filed in and overseen by a federal bankruptcy court. Given the complexity of the proceedings and the long-lasting financial consequences, consulting a qualified bankruptcy attorney is strongly recommended.
Table of Contents
|
Chapter |
Topic |
|
Chapter 1 |
The Foundation of Bankruptcy: Purpose and Distinction |
|
Chapter 2 |
Chapter 7: Liquidation and the Means Test |
|
Chapter 3 |
Chapter 13: Debt Adjustment for Individuals |
|
Chapter 4 |
Chapter 11: Reorganization for Businesses and High-Debt Individuals |
|
Chapter 5 |
Non-Dischargeable Debts and Credit Impact |
|
Chapter 6 |
Essential Public Resources and Next Steps |
Quotations on Bankruptcy
Key Advisories from the sources regarding the bankruptcy process:
“The bankruptcy process is highly complex and has long-lasting financial consequences. Consulting with a qualified bankruptcy attorney is the strongly recommended next step to get advice tailored to your individual situation.”
“The key distinction lies in whether the case involves liquidation (Chapter 7), debt adjustment (Chapter 13), or reorganization (Chapter 11).”
“Certain key obligations are designated as non-dischargeable debts and generally survive the bankruptcy filing, meaning the filer remains legally obligated to pay them.”
Chapter 1: The Foundation of Bankruptcy: Purpose and Distinction
Bankruptcy is a legal tool for a financial fresh start. The three main chapters offer fundamentally different pathways to achieving this goal:
|
Chapter |
Primary Purpose |
Core Action |
Primary Filers |
|
Chapter 7 |
Elimination of most unsecured debts |
Liquidation of non-exempt assets |
Individuals and Businesses |
|
Chapter 13 |
Repayment of debts over time |
Debt Adjustment over 3 to 5 years |
Individuals with regular income |
|
Chapter 11 |
Restructuring debts to continue operation |
Reorganization |
Primarily Businesses; high-debt individuals |
Chapter 2: Chapter 7: Liquidation and the Means Test
Chapter 7, or “straight bankruptcy,” aims for a quick, final break achieved through the sale of non-exempt assets.
- Eligibility for Individuals: Individuals must qualify by passing the Means Test based on their income. This test is a crucial eligibility hurdle based on federal law.
- Asset Outcome: Filers keep exempt assets (necessities like a car, retirement accounts, and a home up to equity limits). A trustee sells the non-exempt assets to pay creditors.
- Business Outcome: For businesses, filing Chapter 7 is terminal; the business is shut down and its assets are liquidated.
- Trustee Role: The trustee oversees the liquidation of the filer’s non-exempt assets.
Chapter 3: Chapter 13: Debt Adjustment for Individuals
Chapter 13 is the debt adjustment option for individuals with regular income.
- Purpose and Duration: The goal is to establish a plan to repay debts over a specific period, typically 3 to 5 years.
- Eligibility: Filers must meet specific debt limits to be eligible.
- Asset Outcome: This chapter allows the individual to keep valuable property (like a home or car) by catching up on missed payments through the court-approved repayment plan.
- Sole Proprietors: Sole proprietors can include their business debts in the repayment plan.
Chapter 4: Chapter 11: Reorganization for Businesses and High-Debt Individuals
Chapter 11 is used for large-scale financial restructuring, allowing the debtor to continue operations.
- Eligibility: Chapter 11 has no debt limits. It is used by businesses and by individuals with high debt who do not qualify for Chapter 13.
- Business Outcome: The business can continue operating while it restructures. It typically remains in control as the “debtor in possession”.
- Financing: After filing, the business may borrow new money with the court’s approval.
Chapter 5: Non-Dischargeable Debts and Credit Impact
Non-Dischargeable Debts
It is crucial to understand that not all debts are erased. Key obligations designated as non-dischargeable generally survive the bankruptcy filing, meaning the filer remains obligated to pay them. These typically include:
- Child support
- Alimony
- Most student loans
- Recent taxes
- Criminal fines
Credit Impact
A bankruptcy filing has a substantial and long-lasting effect on credit reports:
- A filing will remain on your credit report for 7 to 10 years.
- This presence generally makes new credit difficult in the short term.
- However, filing bankruptcy provides a foundation to rebuild your finances over time.
Chapter 6: Essential Public Resources and Next Steps
The sources strongly advise consulting a qualified attorney due to the complexity of the process. The material provides an extensive list of authoritative public resources for both personal and business bankruptcy information.
Resource Links (URLs)
Please Note: The source material did not contain any links or URLs related to www.REISkills.com. The following URLs are the official public resources cited in the sources for bankruptcy information.
|
Resource Category |
Organization |
Website/Direct Path |
|
Official Federal (Most Authoritative) |
United States Courts (.gov) |
www.uscourts.gov (Look for “Bankruptcy Basics”) |
|
Official Federal (Means Test & Trustees) |
U.S. Department of Justice – U.S. Trustee Program |
www.justice.gov/ust (Provides Means Test data and trustee info) |
|
Official Federal (Consumer Rights) |
Consumer Financial Protection Bureau (CFPB) |
www.consumerfinance.gov |
|
Attorney Search |
American Bar Association (ABA) – Find Legal Help |
www.americanbar.org/groups/legal_services/flh-home |
|
Non-Profit/Education (Chapter 7 Focus) |
Upsolve (Low-income assistance) |
www.upsolve.org |
|
Legal Information Publisher |
Nolo (In-depth articles) |
www.nolo.com |
|
Insolvency Research |
American Bankruptcy Institute (ABI) |
www.abi.org |
|
Business Context |
U.S. Small Business Administration (SBA) |
www.sba.gov (Search for “business bankruptcy”) |
Recommended Action Plan
Here is a To-Do List based on the essential advice provided in the source material for anyone considering bankruptcy:
|
Task |
Description |
Date Completed |
|
1. Consult a Qualified Attorney |
Highly advisable due to the legal complexity; mistakes can be costly. |
|
|
2. Review Eligibility |
If considering Chapter 7, check the U.S. Trustee Program for current Means Test data. |
|
|
3. Check Debt Limits |
If considering Chapter 13, verify that your debts meet the specific debt limits for eligibility. |
|
|
4. Identify Non-Dischargeable Debts |
List obligations (like child support, student loans, recent taxes) that cannot be erased. |
|
|
5. Complete Mandatory Counseling |
Find approved credit counseling agencies (mandatory for filing). |
|
|
6. Review “Bankruptcy Basics” |
Study the official procedural guides from the United States Courts. |
Conclusion to Training
This training report has established that bankruptcy is a powerful federal legal process providing a “fresh financial start”. The fundamental distinction between the chapters dictates the outcome: Chapter 7 leads to liquidation and closure, Chapter 13 provides a structured debt adjustment plan for individuals to retain property, and Chapter 11 allows businesses to continue operating through reorganization.
While bankruptcy offers immense relief, it carries long-lasting financial consequences, including a 7-to-10-year impact on credit reports, and critically, it does not erase all debts. Because the process is highly complex, and mistakes risk case dismissal, the source material repeatedly and strongly emphasizes that consulting a qualified bankruptcy attorney is the recommended next step to navigate the legal requirements and confirm individual eligibility.
