The goal of federal bankruptcy laws is to give debtors a financial “fresh start” from burdensome debts. The Supreme Court echoed this this point about the purpose of the bankruptcy law in a 1934 decision:

“[I]t gives to the honest but unfortunate debtor…a new opportunity in life and a clear field for future effort, unhampered by the pressure and discouragement of preexisting debt.”

Types of Bankruptcy

There are six basic types of bankruptcy cases, and we’ll look at those that are most common.

Chapter 7 is called liquidation and is a court-supervised procedure by which a trustee takes over the assets of the debtor’s estate, reduces them to cash, and pays the creditors. Even so, the debtor can keep certain exempt property. If a debtor’s income is in excess of certain thresholds, the debtor may not be eligible for Chapter 7.

Chapter 11, entitled Reorganization, is typically used by companies that want to continue in business and repay creditors with a court-approved plan. Under this plan, a debtor can reduce its debts by repaying a portion and discharging some other debts. A debtor can also cancel contracts and leases, recover assets, and retool its business in an effort to return to profitability.

Chapter 13 is called Adjustment of Debts of an Individual with Regular Income, and is for individual debtors who have a regular source of income. Chapter 13 often works better than Chapter 7 because the debtor can keep a valuable asset such as their house. It also lets the debtor create a plan to repay creditors over three to five years. A Chapter 13 debtor typically remains in possession of the property and makes payments to creditors, through the trustee, but unlike Chapter 7, there’s no immediate discharge of debts. The debtor has to make required payments under the plan before the discharge is received. There is protection for the debtor from lawsuits, garnishments, and other creditor actions while the plan is in effect.

The Bankruptcy Process is Complex

You can see that bankruptcy is complex. You need to have an experienced attorney who knows the law of bankruptcy and can help you or your business with all of the necessary requirements.

Contact James to discuss your bankruptcy questions and find out how he can best help you. Please call (408) 755-9793 or email