This post is the fourth in a series on debt, bankruptcy, debt consolidation, and more. If you haven’t read parts 1-3 yet, I recommend you do before continuing.
We’ve established that bankruptcy and failure are in no way synonymous. So, how does it work? How can bankruptcy be used to get on the path to financial and personal success? To better understand it, let’s break down bankruptcy and discover what it’s all about.
The bankruptcy court
All cases filed under the bankruptcy code are heard by a special court called the bankruptcy court. The bankruptcy court is a Federal court – states do not have the subject jurisdiction to hear bankruptcy cases. Procedures in bankruptcy courts around the country are governed by the Federal Rules of Bankruptcy Procedures, or FRBP.
A bankruptcy case begins when a debtor files bankruptcy under a particular chapter of the bankruptcy code. Depending on which chapter the case is filed under, it will follow different rules. There are many chapters in the bankruptcy code, but the main ones that matter to the majority of individuals and businesses are chapters 7, 11, and 13. Let’s take a brief look at each of them:
Chapter 7 – Liquidation
In a chapter 7 bankruptcy filing, an administrator or trustee is appointed to supervise the sale of the filer’s assets. Certain assets may be exempted from sale, like a primary residence or certain personal property. The trustee then takes the proceeds from the sales and uses it to make a partial repayment of the debtor’s obligations. Many debts that cannot be paid off in full will be forgiven, or “discharged” in legal speak. However, there are some types of obligations that can never be discharged under chapter 7, including back taxes, alimony, and child support. After the case is closed, the debtor will emerge with a small fraction of their previous debt, but also with severe damage to their credit score.
Check back soon for Bankruptcy, Debt Consolidation, and Debt Settlement – Don’t fall prey to scammers! Part 5. In the meantime, check out our page on avoiding debt consolidation scams.