Bankruptcy

Bankruptcy is a proceeding under title 11 of the United States Code in which a debtor's obligations are liquidated or restructured under federal court supervision. The word names a family of procedures rather than one, and the differences are not cosmetic. Chapter 7 liquidates: a trustee may sell property that is not exempt, and most remaining unsecured debt is discharged within months. Chapter 13 reorganizes: the debtor keeps their property and performs a court-approved plan lasting three to five years, with eligible remaining debt discharged at the end. Chapter 11 is the business reorganization chapter, and Chapter 12 exists for family farmers and fishermen.

This page covers the machinery all of those share, which is where the practical questions land: what filing does on day one, what the estate and exemptions are, what a discharge does and does not reach, the two counseling requirements, and how long you must wait to file again.

The automatic stay is the most consequential thing filing does, and it needs no order from anybody. Under 11 USC 362(a), the petition itself operates as a stay against, among other things, the commencement or continuation of any action against the debtor on a pre-petition claim; the enforcement of a judgment already obtained; any act to obtain or control property of the estate; any act to create, perfect or enforce a lien; any act to collect, assess or recover a pre-petition claim; and the setoff of a debt owed to the debtor. In practical terms a wage garnishment stops, a foreclosure sale stops, a repossession stops, and the calls stop, from the moment of filing rather than from a judge's decision weeks later.

The stay has express exceptions at 362(b), and the ones consumers meet most often are family-law matters: establishing paternity, establishing or modifying a support order, custody and visitation, domestic violence proceedings, collecting support from property that is not part of the estate, and withholding income for support under an order. Criminal proceedings are not stayed either.

Filing creates an estate, which is why exemptions decide the outcome. Property of the estate is administered by a trustee, and what the debtor keeps is what exemption law protects. Those figures are adjusted every three years under 11 USC 104 and vary depending on whether federal or state exemptions apply, so no page should recite them. What travels is the shape: retirement savings are protected unusually well, with workplace plan balances generally outside the estate and individual retirement accounts exempt up to a substantial inflation-adjusted cap that does not reach amounts rolled over from a workplace plan.

A discharge kills the debt, not the lien, and the statutory wording is where to see it. Read 11 USC 524(a) closely: a discharge voids a judgment "to the extent that such judgment is a determination of the personal liability of the debtor", and operates as an injunction against any act to collect a discharged debt "as a personal liability of the debtor". Those four words are doing the work. The obligation to pay personally is gone; the creditor's claim against the collateral is not. So a debtor who wants to keep a financed car or a mortgaged house has to keep paying for it, and a debtor who does not can walk away without owing the shortfall.

A companion provision explains where the shortfall goes. Under 11 USC 506(a)(1) a secured creditor's claim is secured only "to the extent of the value of such creditor's interest" in the collateral and is "an unsecured claim to the extent that" the claim exceeds it. That is how one debt becomes two, and the unsecured half is then paid pro rata with other general unsecured claims (11 USC 726(b)), which in a typical consumer Chapter 7 means very little or nothing.

There are two education requirements, not one, and the second one is where cases go wrong. Before filing, 11 USC 109(h)(1) requires an individual to have received a budget and credit counseling briefing from an approved nonprofit agency during the 180-day period ending on the filing date, with narrow exceptions for exigent circumstances and for incapacity or active military duty in a combat zone. After filing, the debtor must complete a separate instructional course in personal financial management, and without it the court will not grant a discharge at all: 11 USC 727(a)(11) in Chapter 7 and 1328(g)(1) in Chapter 13. A case can be otherwise complete and fail on that one step.

The waiting periods are measured from filing, not from discharge. The natural instinct is to count from the date the old case closed, and that is the wrong end of it.

Note what each bar is actually about. Sections 727(a)(8) and (a)(9) are grounds for refusing a discharge, and 1328(f) says the court "shall not grant a discharge" in the new case. None of them prevents filing. A Chapter 13 filed inside the window still delivers the automatic stay and a plan, which is occasionally the point.

Some debts survive whichever chapter you use. The exceptions are a statutory list at 11 USC 523, and they include most taxes, domestic support obligations, debts arising from fraud, criminal fines and restitution, and student loans, which are dischargeable only on a showing of undue hardship proved in a separate proceeding inside the case.

You complete the pre-filing counseling briefing, file a petition with schedules of income, expenses, assets, debts and recent transfers, and pay a fee or seek a waiver. The automatic stay attaches on filing. A trustee is appointed, creditors are notified, and there is a meeting of creditors. In Chapter 7 the trustee administers any non-exempt property; in Chapter 13 the court confirms a plan and you perform it. You complete the post-filing financial management course. The court enters a discharge.

A hypothetical example of the lien point, because it decides more outcomes than any other rule here. Owen owes $14,000 on a car loan and the car is worth $9,000. In his Chapter 7 case, the lender's claim is secured for the $9,000 the collateral is worth and unsecured for the remaining $5,000 ($14,000 minus $9,000).

His discharge wipes out his personal liability on the whole $14,000, including the $5,000 deficiency, which would otherwise have followed him after a repossession. It does not touch the lender's lien on the car. So Owen has a real choice rather than a windfall. He can keep paying and keep the car, or stop paying and surrender it owing nothing afterwards. What he cannot do is keep the car and stop paying, which is what people mean when they say bankruptcy erased the loan.

Pros

• The automatic stay is immediate, requires no hearing, and reaches garnishments, foreclosure sales, repossessions and collection contact at once.
• A discharge ends personal liability on most unsecured debt, which is frequently more than any negotiated settlement would achieve.
• Retirement savings are protected far better than most other assets, and Chapter 13 can cure a mortgage arrears while the borrower keeps the house.
• Court supervision replaces a scatter of separate negotiations, and the exceptions are a published statutory list rather than a creditor's discretion.

Cons

• It stays on a credit report for years, and the record is public.
• Liens survive, so keeping financed property still means paying for it.
• Chapter 7 can require surrendering property that no exemption covers, and Chapter 13 requires performing a plan for three to five years, which many debtors do not complete.
• Several categories of debt are excepted, so a household whose problem is mostly taxes, support obligations or student loans may get much less relief than it expects.
• There are filing, attorney and course costs at the point when money is scarcest, and the waiting periods mean the option cannot be used repeatedly.