Getting Started

The different kinds of bankruptcy. Bankruptcy in the United States seeks to benefit both debtors and creditors by seeing that debtors get relief from debts they can't pay, and that creditors get paid from whatever assets the debtor does not need to live going forward. Bankruptcy is governed by the federal law found in Title 11 of the United States Code. As federal law, it supercedes any conflicting state law by reason of the Supremacy Clause of the Constitution. With the exception of exemptions, it is the same from state to state.

The choice of chapter depends on many factors individual to your situation, and is one of the most important reasons to get good legal advice before filing. Which chapter is best depends on the nature of your debt, your recent income, and the nature
and value of your assets.

Chapter 7

Chapter 7 is the most frequently selected kind of bankruptcy for individuals. The debtor receives a discharge of most unsecured debts within several months of filing the case.

The newly implemented "Means Test" is supposed to identify consumers who can repay some portion of their debts through Chapter 13. At the end of the "test" a debtor who has $100 or more each month not needed for living expenses may be shut out of Chapter 7.

If your debt is mixed business and consumer it is important to know what the legal form of the business is. Corporations and partnerships can file Chapter 7 and Chapter 11; the choice depends on whether the business can be reorganized in Chapter 11 or will be liquidated in Chapter 7. Sole proprietorships are treated for bankruptcy purposes as just one kind of asset of the individual who owns them; thus the owner of a troubled business must file an individual bankruptcy, including all of his assets and liabilities, personal and business, to obtain bankruptcy court protection. The means test does not apply to those whose debt is primarily business debt or taxes, business or personal.

Chapter 13

Chapter 13 is frequently a better choice if you have debts that are not dischargeable in Chapter 7; if you are in default on mortgages or car payments; if you have more property than can be exempted from creditors in Chapter 7; or if you owe taxes or other debts that are not dischargeable in Chapter 7.

To be eligible for Chapter 13, you must have regular income and debts below a certain level.