Bankruptcy: Overview

Topics on this page:

• What is Bankruptcy?
• Chapter 7 (Liquidation)
• Chapter 13 (Individual Debt Adjustment)
• Chapter 7 vs. Chapter 13
• Bankruptcy Process
• What Is a Bankruptcy Discharge and How Does It Operate?
• What Is a Reaffirmation Agreement?
• Credit Counseling and Debtor Education Courses
• Help for veterans prior to filing bankruptcy

What is Bankruptcy?

Bankruptcy is a legal proceeding used when a person or business is unable to repay debts or obligations.  The main goal of bankruptcy is to help you get a “fresh start,” either by discharging your debt or creating a repayment plan with affordable payments.  

Most bankruptcy cases are filed under the three main chapters of the Bankruptcy Code, Chapter 7 (Liquidation), Chapter 11 (Reorganization), and Chapter 13 (Individual Debt Adjustment).  This article focuses on bankruptcy proceedings filed under Chapter 7 and Chapter 13; the most common bankruptcy cases filed by individuals. Chapter 11 is used mostly by businesses.

Chapter 7 (Liquidation)

This chapter of the Bankruptcy Code provides for "liquidation" - the sale of your nonexempt property and the distribution of the proceeds to your creditors. A Chapter 7 bankruptcy case does not involve the filing of a plan of repayment. Instead, a bankruptcy trustee gathers and sells your nonexempt assets and uses the proceeds from the sale to pay holders of claims (creditors). The Bankruptcy Code allows you to keep certain "exempt" property; but the trustee will liquidate your remaining assets to pay off your creditors. You should be aware that filing of a petition under chapter 7 may result in the loss of property.

Because there is usually little or no nonexempt property in most Chapter 7 cases, there may not be an actual liquidation of the debtor's assets. These cases are called "no-asset cases." As a result, the debtor is normally granted a "discharge" of most debts. This means that the debtor will no longer be personally liable for repaying the debts. The debtor normally receives a discharge just a few months after the petition is filed.

In a chapter 7 case, a discharge is only available to individual debtors, not to partnerships or corporations. Although an individual Cchapter 7 case usually results in a discharge of debts, the right to a discharge is not absolute, and some types of debts are not discharged. Moreover, a bankruptcy discharge does not extinguish a lien on property.

For more information see Chapter 7: Liquidation

Read the law: U.S. Code, Title 11, Chapter 7
 

Chapter 13 (Individual Debt Adjustment)

This Chapter of the Bankruptcy Code provides for adjustment of debts of an individual with regular income. Also called a wage earner's plan, Chapter 13 enables individuals with regular income to develop a plan to repay all or part of their debts. Under this Chapter, debtors propose a repayment plan to make installments to creditors over 3 to 5 years. Chapter 13 is often preferable to Chapter 7 because it enables the debtor to keep a valuable asset, such as a house, as they repay their debts over time. 

Unlike Chapter 7, the debtor does not receive an immediate discharge of debts. The debtor must complete the payments required under the plan before the discharge is received. The debtor is protected from lawsuits, garnishments, and other creditor actions while the plan is in effect. The discharge is also somewhat broader (i.e., more debts are eliminated) under Chapter 13 than the discharge under Chapter 7.

For more information see Chapter 13: Adjustment of Debts

Read the law: U.S. Code, Title 11, Chapter 13
 

Chapter 7 vs. Chapter 13

When used

• Chapter 7
  • You have little or no money left after paying basic expenses each month—or you're not even meeting basic expenses.
     
• Chapter 13
  • You have regular income and can pay your living expenses, but you can't keep up the scheduled payments on your debts.

Filing

• Chapter 7
  • You must reside, have a domicile, a place of business or property in the United States or municipality. 
  • You must not have had a bankruptcy petition dismissed for cause within the last 180 days.
     
• Chapter 13
  • Must reside, have a domicile, a place of business or property in the United States or municipality.
  • Must have regular and disposable income.
  • Unsecured debts are less than $465,275 and secured debts are less than $1,395,875.
  • Must not have had a bankruptcy petition dismissed for cause within the last 180 days.

Loss of property

• Chapter 7
  • If you have property that is not exempt, the trustee may sell it to repay your creditors.
     
• Chapter 13
  • Not if payments under the plan are kept current.

Property you are allowed to keep

• Chapter 7
  • ​​​​​​​See Maryland exemptions.
    ​​​​​​​
• Chapter 13
  • ​​​​​​​You may keep all of your property by arranging to repay your debts and the liens on your property.

Average Time from filing to discharge

• Chapter 7
  • ​​​​​​​4-6 months
     
• Chapter 13
  • ​​​​​​​3 year plan - with extension to 5 year for good cause and be approved by the court.

Credit Reports

• Chapter 7
  • ​​​​​​​It may be listed in credit reports for up to 10 years.
     
• Chapter 13
  • ​​​​​​​It may be listed in credit reports for up to 10 years.

Income requirements

• Chapter 7
  • ​​​​​​​None – If you have excess income, the judge may require conversion to Chapter 13.
     
• Chapter 13
  • ​​​​​​​You must have disposable income (more income than what is needed for debtor's basic monthly expenses).

Impact on wages

• Chapter 7
  • ​​​​​​​None
     
• Chapter 13
  • ​​​​​​​The trustee will file a wage garnishment for the plan amount.

Impact on your life

• Chapter 7
  • ​​​​​​​The trustee will liquidate and sell non-exempt property.
    ​​​​​​​
• Chapter 13
  • The Court will set up a plan that will use a portion of future earnings to repay creditors. Once this plan is set up, debtor will again have control of the property except for the part of wages subject to the plan.
  • Within thirty days after the filling of the plan (even if the plan has not yet been approved by the court), the debtor must start making payments to the trustee.
  • Usually the Bankruptcy Court must approve new debt (for example, credit cards.)
  • Most of the property will be controlled by a “bankruptcy trustee” until the plan is approved.

Bankruptcy Process

Federal courts have exclusive jurisdiction over bankruptcy cases. This means that a bankruptcy case cannot be filed in a state court. Bankruptcy cases in Maryland are filed in the United States Bankruptcy Court for the District of Maryland.

A bankruptcy case normally begins by the debtor filing a petition with the bankruptcy court. A petition may be filed by an individual (a debtor), by spouses together (a debtor and joint debtor), or by a corporation or other entity (a non-individual). The debtor is also required to file statements listing assets, income, liabilities, and the names and addresses of all creditors and how much they are owed. 

Creditors receive notice from the clerk of court that the debtor has filed a bankruptcy petition. The filing of the petition automatically prevents, or "stays," debt collection actions against the debtor and the debtor's property. As long as the stay remains in effect, creditors cannot bring or continue lawsuits, make wage garnishments, or even make telephone calls demanding payment.

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. Disputes may give rise to litigation in a bankruptcy case over such matters as:

• who owns certain property;
• how property should be used;
• what the property is worth;
• how much is owed on a debt;
• whether the debtor should be discharged from certain debts; or,
• how much money should be paid to lawyers, accountants, auctioneers, or other professionals. 

Litigation in the bankruptcy court is conducted in much the same way that civil cases are handled in the district court. There may be discovery, pretrial proceedings, settlement efforts, and a trial.

Read the law: U.S. Code, Title 11, Chapter 3

Do I Need and Attorney?

While you can file bankruptcy without an attorney, seeking the advice of a qualified attorney is strongly recommended because bankruptcy has long-term financial and legal outcomes. Self represented individuals are called self-represented litigants, or pro se litigants. Filing personal bankruptcy under Chapter 7 or Chapter 13 takes careful preparation and understanding of legal issues. Misunderstandings of the law or making mistakes in the process can affect your rights. Court employees and bankruptcy judges are prohibited by law from offering legal advice.

The following is a list of ways your lawyer can help you with your case.

• Advise you on whether to file a bankruptcy petition.
• Advise you under which chapter to file.
• Advise you on whether your debts can be discharged.
• Advise you on whether you will be able to keep your home, car, or other property after you file.
• Advise you of the tax consequences of filing.
• Advise you on whether you should continue to pay creditors.
• Help you complete and file forms.

A debtor's involvement with the bankruptcy judge is usually very limited. A typical Chapter 7 debtor will not appear in court and will not see the bankruptcy judge unless an objection is raised in the case. A Chapter 13 debtor may only have to appear before the bankruptcy judge at a plan confirmation hearing. Usually, the only formal proceeding at which a debtor must appear is the meeting of creditors, which is usually held at the offices of the bankruptcy trustee. This meeting is informally called a "341 meeting" because section 341 of the Bankruptcy Code requires that the debtor attend this meeting so that creditors can question the debtor about debts and property.

What Is a Bankruptcy Discharge and How Does It Operate?

One of the reasons people file bankruptcy is to get a “discharge.” A discharge is a court order which states that you do not have to pay most of your debts. Some debts cannot be discharged. For example, you cannot discharge debts for:

• most taxes;
• child support;
• alimony;
• most student loans;
• court fines and criminal restitution; and
• personal injury caused by driving drunk or under the influence of drugs.

The discharge only applies to debts that arose before the date you filed. Also, if the judge finds that you received money or property by fraud, that debt may not be discharged.

It is important to list all your property and debts in your bankruptcy schedules. If you do not list a debt, for example, it is possible the debt will not be discharged. The judge can also deny your discharge if you do something dishonest in connection with your bankruptcy case, such as destroy or hide property, falsify records, or lie, or if you disobey a court order.

You can only receive a Chapter 7 discharge once every 8 years. Other rules may apply if you previously received a discharge in a Chapter 13 case. No one can make you pay a debt that has been discharged, but you can voluntarily pay any debt you wish to pay. You do not have to sign a reaffirmation agreement (see below) or any other kind of document to do this.

Some creditors hold a secured claim. Examples of secured creditors include the bank that holds the mortgage on your house or the loan company that has a lien on your car). You do not have to pay a secured claim if the debt is discharged, but the creditor can still take the property.

Read the law: U.S. Code, Title 11, Chapter 7, §727, U.S. Code, Title 11, Chapter 13, §1328

What Is a Reaffirmation Agreement?

Even if a debt can be discharged, you may have special reasons why you want to promise to pay it. For example, you may want to work out a plan with the bank to keep your car. To promise to pay that debt, you must sign and file a reaffirmation agreement with the court. Reaffirmation agreements are under special rules and are voluntary. They are not required by bankruptcy law or by any other law. Reaffirmation agreements:

• must be voluntary;
• must not place too heavy a burden on you or your family;
• must be in your best interest; and
• can be canceled anytime before the court issues your discharge or within 60 days after the agreement is filed with the court, whichever gives you the most time.

If you are an individual and you are not represented by an attorney, the court must hold a hearing to decide whether to approve the reaffirmation agreement. The agreement will not be legally binding until the court approves it.

If you reaffirm a debt and then fail to pay it, you owe the debt the same as though there was no bankruptcy. The debt will not be discharged and the creditor can take action to recover any property on which it has a lien or mortgage. The creditor can also take legal action to recover a judgment against you.

Read the law: U.S. Code, Title 11, Chapter 5, §524

Credit Counseling and Debtor Education Courses

All individual bankruptcy filers are required to complete pre-bankruptcy credit counseling and pre-discharge debtor education. These may not be provided at the same time. Credit counseling must take place before you file for bankruptcy; debtor education must take place after you file.

Certificate of completion for both credit counseling and debtor education are required but before the filer’s debts can be discharged. Only credit counseling organizations and debtor education course providers that have been approved by the U.S. Trustee Program may issue these certificates. Find an approved credit counseling agency or debtor education provider.

Help for veterans prior to filing bankruptcy

Filing for bankruptcy provides an automatic stay that prevents foreclosure, eviction, and civil court judgments for collections. This automatic stay can be critical in preventing someone from losing their home or having their wages garnished. For instance, for a homeowner, filing can buy time to make arrangements that would allow them to avoid foreclosure.

For military service members, the Servicemembers' Civil Relief Act (SCRA) grants many of those same protections, as well as additional protections for financial obligations such as debt. The SCRA provides services members with:

1. protection against the entry of default judgments, 
2. stay of proceedings,  
3. stay or vacation of execution of judgments, attachments and garnishments,  
4. reduction of interest rates, and 
5. tenant protections.

The language of the SCRA, the Federal Rules of Bankruptcy Procedure and the Federal Rules of Civil Procedure all indicate that the above protections extend to actions that originate in bankruptcy court.

Learn more about the Servicemembers’ Civil Relief Act.

Read the law: U.S. Code, Title 50, Chapter 50