For individuals facing financial difficulties, bankruptcy may offer a path to finding relief from overwhelming debt. However, there are different kinds of bankruptcies and some are available only in specific circumstances. Bankruptcy is the process whereby a person legally declares himself or his business unable to pay outstanding debts. Depending upon the type filed, one meets with a judge to determine a payment schedule or have a legal bankruptcy discharge most if not all debts. Businesses also may declare bankruptcy, which either means the business will close, or that the business will continue to operate with reduced payments to debtors. This section includes information on the basics of bankruptcy, the differences between Chapter 7 and Chapter 13 bankruptcy, the benefits and limits of each, and answers to common questions about bankruptcies.
It's important to understand what "declaring bankruptcy" really means, and the consequences of doing so. The process essentially releases the debtor from personal liability for certain debts through a court order. The discharge also prohibits creditors or collections agencies from communicating with debtors. But when you declare bankruptcy, it can substantially hurt your credit rating and limit your financial options going forward.
Chapter 7 vs. Chapter 13 Bankruptcy
Bankruptcy for individuals, married couples, or domestic partners is distinguished by "chapters," which correspond to the federal bankruptcy code citations. Chapter 7 is the most common form filed by spouses or individuals. Chapter 13 bankruptcy is filed by individuals who own large amounts of property or assets but find that their income cannot cover the exorbitant payments on debts owed.
Is Bankruptcy a Good Idea for You?
There are many factors that should be taken into account when considering filing for bankruptcy. This includes understanding how your debts, such as credit card debt, are "discharged," or removed; keeping your home, car, and certain other property protected from creditors; and what impact your declaration of bankruptcy will have on any co-signers.
Eliminating Tax Debts in Bankruptcy
Very few tax debts may be discharged; a debtor is still liable for most tax debt after bankruptcy, particularly federal taxes. However, bankruptcy law allows the discharge of tax debt only in some very limited circumstances. As a rule of thumb, a debtor is more likely to have tax debt discharged in Chapter 7 than in a Chapter 13 bankruptcy.
How a Bankruptcy Attorney Can Help
Attorneys aren't needed for every bankruptcy case, but in many cases legal assistance can be beneficial, if not crucial. With the complex nature of some bankruptcy procedures, it often helps to have a knowledgeable resource for information and a skilled advocate for negotiations and likely court proceedings.