Bankruptcy

Bankruptcy is a federal court procedure that helps consumers and businesses get rid of their debts and repay their creditors. If you can prove you are entitled to it, the bankruptcy court will protect you during your bankruptcy proceeding. In general, bankruptcies can be categorized into two types - liquidations and reorganizations.

While there are several different types of bankruptcies, Chapter 7 and Chapter 13 proceedings are the most common for individuals and businesses. Other types are Chapter 11 bankruptcy proceedings, normally used by struggling businesses as a way to get their affairs in order and pay off their debts. Chapter 12 bankruptcy is very much like Chapter 13 bankruptcy, except it is only available to people with at least 80 percent of their debts arising from a family farm.

Chapter 7 bankruptcies normally fall in the liquidation category, meaning your property could be sold in order to pay back your debts. Both individuals and businesses are allowed to file for Chapter 7 bankruptcy. These proceedings typically last between three and six months.

Chapter 13 bankruptcies generally fall under the reorganization category, meaning you will probably be able to keep your property, but you must submit and stick to a plan that will allow you to repay some or all of your debts within three to give years. Also known as the "wage earner" bankruptcy proceeding, only people with a reliable source of income are allowed to file for Chapter 13 bankruptcy.

In many cases, the type of bankruptcy filed will be contingent on two things: Your income and your assets. Your income is important because it may preclude you from filing a simple Chapter 7 case, and your assets are important because if you have nonexempt property, you might lose it in Chapter 7, but can protect it in Chapter 13.

Once you've decided that bankruptcy is the right solution for your financial situation, you will need to decide which type of bankruptcy is most beneficial. We'll go over the pros and cons of each, the eligibility rules, and give you some information to help decide which would be best for you given your financial situation.