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What is Bankruptcy Protection?

Being Given another Chance

Bankruptcy protection is the status given to an individual or business that are unable to pay back their debts in full.  The bankruptcy protection process can be initiated by either the debtor themselves or even a court in some circumstances.

Governmental laws regarding bankruptcy protection were created to assist people who are struggling financially to restructure the debt that’s owed to their creditors.  The hope in this is, that after the subsequent restructuring, the entity at hand will be able to realistically pay back their debt, and move forward with their business.

Federal and State Law Affect Bankruptcy Protection

Relative to other countries like those in the EU, bankruptcy protection rules in the United States are less strict and contain fewer conditions.

Bankruptcy protection is governed under federal laws if someone files in the United States.  The set of laws that deal with bankruptcy protection is commonly referred to as the Bankruptcy Code.  Many states have their added their own set of new conditions to laws appertaining to filing for bankruptcy protection.  However, they still compliment the main body of federal bankruptcy protection laws.

One who files for bankruptcy protection must do so in specifically designated bankruptcy courts.  Depending on the state in which one files will decide to which rules and regulations one is subject.

In some cases where one files for bankruptcy protection, their debt is discharged.  This means that the creditor is disallowed from collecting any of the previously owed debt.  In other instances of bankruptcy protection, one will get their debt restructured. This means that the amount of the debt is reduced, and often the terms of repayment are changed.

Different Types of Bankruptcy Protection

Within the Bankruptcy Code, there are six types, or chapters, of bankruptcy protection.  They are Chapter 7, Chapter 9, Chapter 11 Chapter 12, Chapter 13 and Chapter 15.  The most common ones are Chapter 7 and Chapter 11.

Chapter 7 is the most simple of all the bankruptcies, and in most scenarios, filed by individuals.  This type of bankruptcy protection involves the liquidation of all the assets of the debtor, and pays off their debts.  This process takes between 3 and 5 months. Most of the individual’s debt is wiped clean, with few exceptions.

Chapter 11 is slightly more complex.  This form of bankruptcy protection is usually filed by businesses, and allows for the company to continue running as they simultaneously are financially reorganizing.

Additional Facts About Bankruptcy Protection

In many cases of bankruptcy protection, all of the debtor’s assets are entrusted to a trustee who is in charge of looking after the assets.  In cases of liquidation, the trustee oversees the liquidation of the assets and gives the money to the respective creditors.

After someone who filed for bankruptcy protection has had their assets liquidated, they will likely receive a discharge of some or all of the remaining debt.  If the debtor is found to have been dealing in inappropriate behavior concerning their debts, the likelihood of receiving the discharge is significantly decreased.

In some cases, a debtor may be able to get an exemption on some of their properties. This allow the property to be retained by the debtor through the bankruptcy protection process.