Question: What is bankruptcy?

Answer: Bankruptcy is a federal court process which allows a person or a business to eliminate or reduce their debts, or with a business they can restructure or reorganize so that they can eliminate their debts. Most individual people will want to file for a Chapter 7 bankruptcy, that is also called a liquidation. The process takes about four to six months from the date of filing to discharge. There are some restrictions on it but if a person does not have a lot of assets, does have quite a bit of debt and not a large income, then Chapter 7 bankruptcy is usually the best option to wipe out the debts that are there.

Chapter 13 bankruptcy is known as a debt adjustment. That allows an individual or a family to stop a foreclosure and stop collection activity and plan a repayment over a three- to five-year period. The amount that has to be paid on the debts is based on the income of either the individual—or if it’s a husband and wife or spouse situation, the combined income. That has some benefits for those who are just having a hard time for a particular reason or have a high debt on one particular area but want to save the rest of their assets and things like that. And just generally, some debts cannot be discharged in bankruptcy: federal student loans, back child support and alimony and some tax debts generally cannot be discharged.

There are some exceptions. And then for businesses a Chapter 11 is generally what a business is going to look at. That is required for corporations, limited liability companies or partnerships. Also, if an individual or spouses have high debt, they may be required to file a Chapter 11 as opposed to Chapter 13, depending on the amount of debt. So the Chapter 11 would allow a business to reorganize their debt and to continue operation.

And then the other type of bankruptcy that is generally talked about is a Chapter 12. That’s used for farmers or commercial fishermen. Generally speaking, that allows for seasonal repayment of debts along with a reorganization or a restructuring.

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