What is bankruptcy?

Bankruptcy is a process in which an individual or company files a court action declaring that he or it is financially unable to pay off debts. During bankruptcy, a court liquidates a person or company's assets, discharges debt, and repays a portion back to creditors (if there are any available funds). Bankruptcy also provides for an orderly process for reorganizing businesses and distributing payments to creditors. Bankruptcy has its own set of federal courts, as nearly every one of the 94 federal judicial districts in the country has its own bankruptcy court.

What are the basic types of bankruptcy?

There are six different types of bankruptcy cases, but by far the two most common are Chapter 7 bankruptcy and Chapter 13 bankruptcy. The other forms are Chapter 9, Chapter 11, Chapter 12, and Chapter 15. The types are so-named after the chapters they fall under in the Bankruptcy Code.

Chapter 7—sometimes referred to as straight bankruptcy or liquidation bankruptcy—is the most commonly filed form of bankruptcy. Most individual consumers file Chapter 7 bankruptcy. This form is ideal for consumers with modest economic means, little in the way of assets, and high debts. In Chapter 7, most of the time a consumer's debts are discharged—meaning they are wiped away clean, giving the person a chance at a fresh start in life. More than 60 percent of all bankruptcy cases are filed under Chapter 7.

Chapter 13 is referred to as reorganization bankruptcy for individuals. In such a bankruptcy, individuals repay a portion of their debts over a three- to five-year period.

What must a consumer do before filing bankruptcy?

A consumer contemplating filing bankruptcy must undergo credit counseling within 180 days before filing for bankruptcy. This requirement was added as a result of the

Bankruptcy Abuse Prevention and Consumer Protection Act of 2005. The debtor must present the bankruptcy court with a certificate of completion from such counseling. The law requires that bankruptcy courts maintain a list of approved credit counselors in the area and the courts do review counselors to determine if they are appropriate places for consumers to receive such services.

When filing a bankruptcy petition, the consumer must include much information. These filings must include the following: a list of creditors; a listing of assets and liabilities, current income and payment obligations, statement of financial affairs, copies of all payment advances, statement of monthly net income, and a statement disclosing any expected future income in the coming year. These various forms can be obtained from the Bankruptcy Courts website at

The consumer may also have to provide tax returns and photo identification. These various forms are referred to as "schedules," and consumers must take great pains to insure that the information is both accurate and complete. For example, completed schedules include Form 6 Schedules— Statistical Summary of Certain Liabilities and Related Data (28 U.S.C. § 159):

Schedule A: Real Property Schedule B: Personal Property Schedule C: Property Claimed as Exempt Schedule D: Creditors Holding Secured Claims Schedule E: Creditors Holding Unsecured Priority Claims Schedule F: Creditors Holding Unsecured Nonpriority Claims Schedule G: Executory Contracts and Unexpired Leases Schedule H: Codebtors

Schedule I: Current Income of Individual Debtor(s) Schedule J: Current Expenditures of Individual Debtors(s)

After a consumer files a bankruptcy petition, the court will notify the different creditors of the petition. The court will appoint a bankruptcy trustee, who will serve as the moderator and controller of the debtor's estate and assets.

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