Bankruptcy is a way for people or businesses who owe more money than they can pay right now, (a "debtor"), to either work out a plan to repay the money over time, under Chapter 11 12, or 13, or for most of the bills to be wiped out ("discharged"), as in a Chapter 7 case. While the debtor is either working out the plan or the trustee is gathering the available assets to sell, the Bankruptcy Code provides that creditors must stop all collection efforts against the debtor. When the bankruptcy petition is stamped "Relief Ordered" upon filing, you are immediately protected from you creditors.

Any person, partnership, corporation or business trust may file a bankruptcy. If the person or entity who owes the money, referred to as the debtor, starts the bankruptcy, it is called a voluntary bankruptcy. The people or entities that are owed money, referred to as the creditors, can also file a petition against a person or an entity who owes them money, and that is called an involuntary bankruptcy. In an involuntary case, the debtor gets a chance to contest the petition and contend it should not be in bankruptcy. Involuntary cases can only be filed under Chapter 7 or 11. Voluntary cases can be filed under Chapters 7, 9, 11, 12, and 13. Certain types of entities, such as banks and insurance companies, may not be eligible to file bankruptcy, however, almost all other entities can file a bankruptcy. A business that is not a partnership, corporation or business trust, cannot file a separate bankruptcy on its own. Those assets and debts would be included in the personal bankruptcy of the owner(s).

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Chapter 7 is the liquidation chapter of the Bankruptcy Code. Chapter 7 cases are commonly referred to as "straight bankruptcy" or "liquidation" cases, and may be filed by an individual, corporation, or a partnership. Under Chapter 7, a trustee is appointed to collect and sell all property that is not exempted to use any proceeds to pay creditors. In the case of an individual, the debtor is allowed to claim certain property exempt (see discussion in number 12 below). In exchange for this, the debtor gets a discharge, which means that the debtor does not have to pay certain types of debts (see discussion in numbers 19, 20, and 21 below). Corporations and partnerships do not receive discharges. Consequently, any individuals legally liable for the partnership's or corporation's debts will remain liable. Therefore, individual bankruptcies may be required as well as the corporation or partnership bankruptcy.

Chapter 9 is only for municipalities and governmental units, such as schools, water districts, and so on.

Chapter 13 is the debt repayment chapter for individuals with regular income whose debts do not exceed $1,000,000 ($250,000 in unsecured debts and $750,000 in secured debts), including individuals who operate businesses as sole proprietorships. It is not available to corporations or partnerships. Chapter 13 generally permits individuals to keep their property by repaying creditors out of their future income. Each Chapter 13 debtor proposes a repayment plan which must be approved by the court. The amounts set forth in the plan must be paid to the Chapter 13 trustee who distributes the funds for a small fee. Many debts that cannot be discharged can still be paid over time in a Chapter 13 plan. After completion of payments under the plan, Chapter 13 debtors receive a discharge of most debts.

Chapter 12 offers bankruptcy relief to those who qualify as family farmers. There are debt limitations for Chapter 12, and a certain portion of the debtor's income must come from the operation of a farming business. Family farmers must propose a plan to repay their creditors over a period of time from future income and it must be approved by the court. Plan payments are made through a Chapter 12 trustee who also monitors the debtor's farming operations while the case is pending.

Chapter 11 is the reorganization chapter available to businesses and individuals who have substantial assets and/or income to restructure and repay their debts. Creditors vote on whether to accept or reject a plan of reorganization which must be approved by the courts. While the debtor normally remains in control of the assets, the court can order the appointment of a trustee for cause, such as when the debtor does not get a plan approved in a reasonable amount of time, or fails to follow some of the rules, or breaks the law. In addition to the filing fee paid to the Clerk, a quarterly fee shall be paid to the U.S. Trustee in all Chapter 11 cases. There is no debt limit under Chapter 11. However, only a Chapter 11 debtor that qualifies as a small business may request expedited treatment under Chapter 11. To qualify as a "small business", the debtor must be engaged in commercial or business activities, other than the ownership of real property, and the total of its secured plus unsecured debts must be less than $200,000. Due to the expense and complexity of Chapter 11, the decision to file a Chapter 11 petition should be made in consultation with an attorney.

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You have a choice in deciding which chapter of the Bankruptcy Code will best suit your needs. The decision whether to file a bankruptcy, and under which chapter to file depends on the particular circumstances of the debtor. In general, Chapter 7 is appropriate when the debtor has insufficient income to pay all or most of his/her debts. Otherwise, if the debtor has an income or property and can afford to pay all or a substantial portion of his/her debts, Chapter 11, 12, or 13 may be appropriate depending on whether the debtor is an individual, partnership, corporation, or family farmer.

The decision whether to file a bankruptcy and under which chapter is an extremely important decision and should be made only with competent legal advice from an experienced bankruptcy attorney after a review of all of the relevant facts of the debtor's case.

If a creditor continues to attempt to collect a debt after the bankruptcy if filed, in violation of the automatic stay, you should immediately notify the creditor in writing that you have filed bankruptcy, and provide them with either the case name, number, and filing date, or a copy of the petition that shows it was filed. If the creditor still continues to collect, the debtor may be entitled to take legal action against the creditor to obtain a specific order from the court prohibiting the creditor from taking further collection action and, if the creditor is willfully violating the automatic stay, the court can hold the creditor in contempt of court and punish the creditor by fine or incarceration. Any such legal action brought against the creditor will be complex and will normally require representation by a qualified bankruptcy attorney.

The bankruptcy petition, schedules and plan are a public document and are available to the general public at the Clerk's Office. Credit reporting agencies regularly collect information from the petitions filed and report the information on their credit reporting services. Bankruptcies normally will remain on your credit report for up to ten (10) years and may be taken into consideration by any person reviewing a credit report for the purposes of extending credit in the future. The decision whether to grant you credit in the future is strictly up to the creditor and varies from creditor to creditor depending on the type of credit requested. There is no law which prevents anyone from extending credit to you immediately after the filing of a bankruptcy, nor will a creditor be required to extend credit to you. The best way for you to obtain credit in the future is to generate adequate and regular income and pay all of your financial obligations in a timely and responsible manner. Many creditors will not deal with you in the future unless you have already established credit with someone else and demonstrate that you are a reliable debtor.

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