What Is Bankruptcy?

By: Attorney Christine A. Gimber – Weld Riley, S.C.

People occasionally find themselves with medical debt, credit card debt or other debt that has grown too large for them to maintain any longer.  As a result of not being able to pay accumulated debt, a person may find herself subject to lawsuits and even garnishment of wages.  With no other options, bankruptcy may be the only way to find relief.  

Bankruptcy is a legal means for a person to have their debts modified or discharged entirely.  To achieve this, a person must file a petition in the Federal Bankruptcy Court.  The petition will list all of a person’s debt, real estate, personal property and income. 

In a Chapter 7 bankruptcy, the debtor will ask the Bankruptcy Court to discharge all of her unsecured debt so that it no longer has to be repaid.  A debtor may ask that secured debt, such as car loans or a home mortgage, be repaid under the original terms of the loan or may ask that the loan be modified.  In some instances, a debtor may permit the creditor to take back the collateral securing the debt. 

In a Chapter 13 bankruptcy, commonly known as a “wage earners plan,” a debtor will propose a “Plan” to repay all or some of her debt.  Creditors can object to the terms of a proposed Plan.  The debtor and her creditors will usually negotiate a Plan that is acceptable to all parties.  Once a Plan is accepted, or “confirmed”, the debtor will make regular payments to the Chapter 13 Trustee, usually a set amount from each paycheck.  The Trustee will then accumulate the payments and distribute funds to the creditors according to the terms of the Plan.  Chapter 13 Plans can continue for up to five years.

Bankruptcy is a serious decision with long-term consequences.  The filing of bankruptcy will immediately reduce a person’s credit rating.  Credit bureaus will carry a bankruptcy on a credit report for up to ten years.  This will make it more difficult and expensive for a person who has filed bankruptcy to get credit in the future.  It may even make it more difficult to rent a house or an apartment.  A person should not enter into bankruptcy lightly.  Rather, before filing bankruptcy, a person should talk with an attorney or financial planner to explore any other options that may be available short of filing bankruptcy.  If a person determines her best option is to file bankruptcy, it is recommended she retain the services of a qualified attorney to help her through what can be a complex and lengthy process.