Bankruptcy Basics

en Español

Bankruptcy is a proceeding in which a court administers the estate (the property and other assets) of a debtor for the benefit of creditors.

A debtor (a person or business who owes money to others) may choose to file a bankruptcy proceeding to resolve a hopeless financial situation, or to stave off the collection of debts for a period of time to allow for financial reorganization.

Individuals or businesses may file for bankruptcy. In some cases, a creditor (a person or business that is owed money) may force the filing of a bankruptcy proceeding, although these "involuntary" proceedings are very rare.

What Law Applies to Bankruptcy?

The United States Constitution authorizes Congress to adopt "uniform laws" on bankruptcy. The federal bankruptcy law has two goals:

• To obtain fair treatment for creditors, and
• To obtain a fresh start for both consumer and business debtors involved in bankruptcy proceedings.

Federal bankruptcy law governs bankruptcy proceedings, except, when Congress has chosen to defer to state law.

Should I File Bankruptcy?

There's no magic formula for deciding when bankruptcy is the right choice. It's an option you might consider if you:

• Are paying only minimum amounts on your bills
• Can't budget yourself out of debt within five years
• Are getting notices that your mortgage or loans are being foreclosed
• Have had a severe financial setback, such as losing your job or a major client, a divorce or a costly illness

Alternatives to Bankruptcy

Alternatives to bankruptcy include:

• Trying to negotiate with creditors to reduce monthly payments or to skip some payments
• Getting help from a nonprofit credit counseling group.

Consequences of Bankruptcy

A debtor may not be fired from a job because of filing for bankruptcy. However, creditors may take a past bankruptcy into consideration when deciding whether to extend credit. Many creditors regard a person who has filed for bankruptcy to be a higher credit risk and may either refuse to extend credit or only extend credit on less favorable terms. Bankruptcy filings remain on a consumer's credit report for seven to 10 years. It usually takes at least three years to reestablish your credit rating.

Bankruptcy doesn't get rid of all debts. Among those excluded are:

• Alimony
• Child support
• Recent back taxes
• Student loans
• Recent large purchases
• Fines or penalties of government agencies
• Fraudulent debts

What Are the Kinds of Bankruptcy?

Federal bankruptcy law contains several different groups of provisions called "Chapters," governing specific types of bankruptcy proceedings.

• Chapter 7 (Straight Bankruptcy) proceedings involve the complete liquidation of the debtor's estate.
• Chapter 9 - Municipal governments may also file for bankruptcy under Chapter 9.
• Chapter 11 (Business Bankruptcy) proceedings technically are also available to consumer debtors, although unlikely to be more advantageous than either a Chapter 7 or Chapter 13 proceeding.
• Chapter 12 (Family Farm Bankruptcy) governs family farm bankruptcies.
• Chapter 13 (Wage Earner Bankruptcy) permits the payment of debts pursuant to a repayment plan.

A consumer, or non-business debtor, can file for bankruptcy under either Chapter 7 or Chapter 13.

Businesses may file for straight bankruptcy under Chapter 7 or under Chapter 11, which is designed for business bankruptcy reorganizations.

The Bankruptcy Code contains a special provision (Section 304) for bankruptcy proceedings involving the U.S. assets of foreign companies.

Sherrie Bennett is the former director of Student Legal Services at the University of Washington in Seattle.

Bankruptcy Message Board for more help