Bankrupt in USA? Here’s the Legal Implications!

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What is Bankruptcy?

This concept allows individuals, couples, and businesses that cannot meet their financial obligations to be excused from repaying some or all of their debt. The recent economic downturn put many in a difficult financial position, unable to repay all of their obligations. This has been true for not just individuals, but businesses and cities, as well. When this occurs, the law provides a mechanism for getting out of control debts back under control, either by restructuring debt or wiping out certain types of obligations. In a layman’s sense, Bankruptcy is a legal proceeding that helps some people who cannot pay their bills get a fresh financial start by temporarily, or permanently, preventing creditors from collecting debts from them. It has been in existence since ancient times. In the United States, the rules and procedures for filing the above concept are governed by federal law. States are prohibited from legislating in this area of the law due to its crucial nature.

Types of Bankruptcy                                                                                                      

  1. Liquidation Bankruptcy: Also referred to as “ordinary”, “straight,” or “Chapter 7” bankruptcy, is the most common form of bankruptcy for individuals. “Liquidity” is a term often used in accounting to refer to how quickly assets (property that a person owns) can be turned into cash. It name from this principle because it is designed to convert the debtor’s property into cash, which is then used to repay creditors. In exchange, most or all of the liquidation bankruptcy filer’s debts are discharged (wiped out). Here, debtors must surrender their property, which is sold, and the proceeds distributed to creditors.
  2. Reorganization bankruptcy: Also referred to as Chapter 13 bankruptcy. This is opposed to something like Chapter 7, which is classified as a liquidation bankruptcy. In a Chapter 7 bankruptcy you must give any non-exempt property that you have in exchange for most of your debts being wiped out. Unlike this liquidation process, during a Chapter 13, you will not have to forfeit any property. Instead, you will be required to make a structured repayment plan that shows how you will use your income to pay off your debts over time, typically three to five years.

Learning how to handle bankruptcy

The fact that a liquidation bankruptcy wipes out debt completely is obviously attractive to anyone who cannot afford to pay their bills. But what about people who have non-exempt property that they do not want to give up? Chapter 13 comes into play. It allows debtors to keep their property by agreeing to make monthly payments toward their debt over the course of three to five years. This concept is not available to everyone. Those who have had their debts discharged in a Chapter 7 within the past eight years cannot re-file. For Chapter 13, the waiting period is six years. Too much disposable income is also a problem. Congress has established a “means test” for this purpose. Debtors who make enough money to repay their creditors will be barred from filing a liquidation bankruptcy, though reorganization may be an option. So, the next but salient question is

Which Debts Can be Discharged?

Although not all debts can be discharged, the majority of a person’s debts will be discharged through Chapter 7, especially in the absence of extraordinary circumstances. Only debts that arose before the date of filing for Chapter 7 will be discharged, however. A debtor will still be responsible for any debt incurred after filing a petition but before receiving a discharge. Below is a list of the most commonly discharge debts. However, any misconduct or fraud in connection with the below categories may affect whether they can be discharged or not. Again, if in doubt, contact a local bankruptcy attorney.

Commonly Discharged Debts:

  1. Credit card charges (including overdue and late fees)
  2. Collection agency accounts
  3. Medical bills
  4. Personal loans from friends, family, and employers (you may also be discharging those relationships, though, and there is nothing a court can do about that!)
  5. Utility bills (past due amounts only, not future bills)
  6. Dishonored checks (unless based on fraud. Beware, there may be criminal penalties for bad checks)
  7. Some student loans (only in a few rare circumstances Below is a list of the most commonly discharge debts. However, any misconduct or fraud in connection with the below categories may affect whether they can be discharged or not. Again, if in doubt, contact a local bankruptcy attorney.For more information on Bankruptcy laws, other laws and a list of legal attorneys/firms that handle these issues and more. Visit or send us an email at