Bankruptcy can be very confusing and misleading. The purpose of this blog is to give the consumer some basic information regarding bankruptcy. Bankruptcy is the most serious byproduct of insolvency, which is the inability to pay one’s debts as they are due. Although bankruptcy filings are more difficult to get than they were 10 years ago they are still a last resort for people and businesses to “wipe the slate clean” concerning their debt. Bankruptcy is a legally declared inability or impairment of ability of an individual or organization to pay its creditors. Creditors may file a bankruptcy petition against debtors or consumers know as involuntary bankruptcy in an effort to recoup a portion of the monies they are owed or initiate a restructuring. In the majority of cases, bankruptcy is initiated by the debtor as a voluntary bankruptcy that is filed by the insolvent individual or organization. One of the main purposes of Bankruptcy Law is to give a person, who is hopelessly burdened with debt, a fresh start by wiping out his or her debts.
Typically bankruptcy is a direct result of one of the “Four D’s”: Disaster (flood, tornado, hurricane, etc), Disease (cancer, leukemia, heart illness, etc), Divorce, and Death. Usually, when a person declares bankruptcy to obtain relief from debt, this is accomplished either through a discharge of the debt or through a restructuring of the debt. Normally, when a person files for voluntary bankruptcy, the bankruptcy case begins.
There are six types of bankruptcy listed under the Bankruptcy Code, which are located in Tile 11 of the United States Code, which is Federal Law. Here is a listing of each chapter of bankruptcy:
• Chapter 7 is the basic liquidation of assets for individuals and businesses. Chapter 7 Bankruptcy is the quickest and simplest form of bankruptcy to file.
• Chapter 9 is a municipal bankruptcy, which is a federal resolution for resolving civic and public debts.
• Chapter 11 is designed for corporate bankruptcy. Chapter 11 Bankruptcy is the reorganization and rehabilitation of business debtors, which often allows business to continue to operate while the debts are repaid.
• Chapter 12 is the reform and rehabilitation of family famers, family fisheries, and fishermen.
• Chapter 13 is restructuring of debt with a payment plan for individuals with a regular source of income. Chapter 13 Bankruptcy helps individuals develop a repayment plan for all or part of their debts.
• Chapter 15 is auxiliary or secondary bankruptcy for international cases. Chapter 15 Bankruptcy provides a method for dealing with international debtors and helps forging debtors to alleviate their debts.
The most common two types of bankruptcy for the majority of Americans are Chapter 7 and Chapter 13. Therefore, those two types of bankruptcy merit a bit more attention. It is estimated that as much as 65% of all U.S. consumer bankruptcy are filed under Chapter 7.
Chapter 7 bankruptcy, sometimes call a straight bankruptcy is a liquidation proceeding. The debtor turns over all non-exempt property to the bankruptcy trustee who then converts it to cash for distribution to the creditors. The debtor receives a discharge of all dischargeable debts usually within four months. In the vast majority of cases the debtor has no assets that he would lose so Chapter 7 will give that person a relatively quick new start.
Chapter 13 Bankruptcy is also known as a reorganization bankruptcy or Wage Earner Bankruptcy. Chapter 13 bankruptcy is filed by individuals who want to pay off their debts over a period of three to five years. This type of bankruptcy appeals to individuals who have non-exempt property that they want to keep. It is also only an option for individuals who have predictable income and whose income is sufficient to pay their reasonable expenses with some amount left over to pay off their debts.

Before deciding to file bankruptcy consult with family and friends regarding your debts. Discern the strengths and limitations of your decision and reflect upon them with much seriousness. In addition, check with a debt management company regarding your financial situation to see if bankruptcy is really your final option. Finally, get a free consultation and legal advice from a bankruptcy attorney.
If you decide to declare bankruptcy it does not come without a price-tag. First, bankruptcy will be expensive because you will need to obtain legal counsel from a lawyer who specializes in bankruptcy. Second, you will have to go to court and state your case in from of a judge, which will also cost you money. Third, once the judge rules on your case and makes a judgment it is final and you are responsible for upholding the court’s decision. If not, you are accountable to the court and will be held in contempt of court, which again will cost you even more money. Again, filing for bankruptcy is a last resort to restructure your debts and should be broached and contemplated with the upmost seriousness.
Art Canales, D.Min., President
Cornerstone Financial Education
Austin, TX