For many Americans, bankruptcy has an undeserved reputation as being seen as either a sign of personal and financial failure, or as a way for an unscrupulous person to somehow cheat the system by accumulating debts they have no intention to pay.

The reality is far different from the perception.

The fundamental purpose of bankruptcy is to given honest debtors who have accumulated far more debt than they can reasonable hope to repay a way to work in concert with their creditors to resolve or even eliminate their debt load.

Bankruptcy allows the individual debtor opportunity to settle their debts in a way fair to both debtor and creditor so that they can get their financial life back on track. To accomplish this goal, individual bankruptcies most often fall under two chapters of US bankruptcy law known as Chapter 7 and Chapter 13.

In a Chapter 7 bankruptcy is commonly referred to as a liquidation bankruptcy. In this type of bankruptcy, a court-appointed trustee is authorized to seize certain types of personal property from the debtor, sell them and use the proceeds to repay creditors. What can be seized, however, is limited by both state and federal law and whether the property is used to secure a debt.

In reality, many individuals who file under Chapter 7 have little to no property that can be sold to satisfy creditors. In many Chapter 7 cases, the debtor is released from their debts due to lack of assets to satisfy creditors.

However, courts will apply a means test to see if a debtor qualifies for a Chapter 7 bankruptcy. If they do not qualify, their next choice would be to file for a Chapter 13 bankruptcy.

In a Chapter 13 bankruptcy, debts are normally restructured or reduced rather than completely written off as in a Chapter 7 bankruptcy. The debtor normally retains their property and is allowed to present a payment plan to the court in which they agree to make regular payments to a trustee for distribution to their creditors. Repayment plans normally range from three to five years.

The debts are discharged at the end of the payment plan.

Regardless of which type of bankruptcy an individual chooses, bankruptcy law does provide immediate relief from creditors hounding them and demanding payment. Part of the bankruptcy process is a court-ordered action known as an ‘automatic stay’ – this bars creditors from taking any further collection action against the debtor.

Bankruptcy can give you the fresh start you need to build a better future, but it should not be undertaken without competent legal advice from experienced bankruptcy attorneys. Contact us to see if bankruptcy is right for you.