Bankruptcy laws help people who can no longer pay their creditors get a fresh start – by liquidating assets to pay their debts or by creating a repayment plan. Bankruptcy laws also protect troubled businesses and provide for orderly distributions to business creditors through reorganization or liquidation.
A bankruptcy case normally begins by the debtor filing a petition with the bankruptcy court. A petition may be filed by an individual, by a husband and wife together, or by a corporation or other entity. Creditors receive notice from the clerk of court that the debtor has filed a bankruptcy petition. Some bankruptcy cases are filed to allow a debtor to reorganize and establish a plan to repay creditors, while other cases involve liquidation of the debtor's property.
You can choose the kind of bankruptcy that best meets your needs (provided you meet certain qualifications):
Chapter 7 – Section of the Bankruptcy Code providing for the “liquidation” or sale of a debtor’s nonexempt property and the distribution of the proceeds to creditors. It is also commonly known as the “fresh start” type bankruptcy.
Chapter 11 – This is used mostly by businesses. You may continue to operate your business, but your creditors and the court must approve a plan to repay your debts. There is no trustee unless the judge decides that one is necessary; if a trustee is appointed, the trustee takes control of your business and property.
Chapter 13 – Section of the Bankruptcy Code providing for adjustments of debts of an individual with regular income. A Chapter 13 allows a debtor to keep property and pay debts over time, usually three to five years.
Chapter 12 – Like chapter 13, but it is only for family farmers and family fishermen.