What bankruptcy actually is

What is bankruptcy, in one paragraph?

Bankruptcy is a set of federal laws and rules that can help individuals and businesses who owe more debt than they can pay, either by liquidating assets to pay debts or by creating a repayment plan (Bankr. D. Md. official page — Legal Overview). Cases are filed in the bankruptcy court, and federal courts have exclusive jurisdiction over them, which means a bankruptcy case cannot be filed in a state court. The vast majority of cases are filed under three main chapters of the Bankruptcy Code: Chapter 7, Chapter 11, and Chapter 13.

The statute states who can use it. Only a person that resides or has a domicile, a place of business, or property in the United States, or a municipality, may be a debtor (11 U.S.C. § 109). A "debtor" is simply the person or entity that filed the case (Bankr. D. Minn. official page — Who is the "Debtor"?), and a "creditor" is a person or entity to whom the debtor owes money, or who claims to be owed money.

Why does this matter if you are considering it?

The primary purposes of bankruptcy law are stated plainly by the courts themselves: to give an honest debtor a "fresh start" in life by relieving the debtor of most debts, and to repay creditors in an orderly manner to the extent the debtor has property available for payment (Bankr. D. Md. official page — Legal Overview).

Those two purposes explain most of what follows. Because the point is a fresh start, there is a discharge — a court order relieving you of the obligation to pay dischargeable debts. Because the other point is orderly repayment, there is a trustee, there are schedules listing everything you own and owe, and there are consequences for concealing assets.

Relief is also not only about erasing debt. Sometimes it is as important, or more important, for an individual to use bankruptcy to provide time to cure past defaults (U.S. Bankr. Ct. D. Ariz., Choosing Your Chapter). That is a different goal, and it points toward a different chapter.

How does a bankruptcy case actually work?

A case normally begins when the debtor files a petition with the bankruptcy court. A petition may be filed by an individual, by spouses together as a joint case, or by a corporation or other entity. The debtor is also required to file statements listing assets, income, liabilities, and the names and addresses of all creditors and how much they are owed (Bankr. D. Md. official page — Legal Overview).

Filing the petition automatically prevents, or "stays," debt collection actions against the debtor and the debtor's property. As long as the stay remains in effect, creditors cannot bring or continue lawsuits, make wage garnishments, or even make telephone calls demanding payment.

The clerk then notifies creditors. In many consumer liquidation cases there is little or no money available from the estate to pay creditors, so there are few disputes and the debtor is normally granted a discharge of most debts without objection. Where disputes do arise, they are litigated much like civil cases in the district court.

• Credit counseling: the law generally requires a briefing from an approved agency within the 180 days before you file (11 U.S.C. § 109(h)).
• Filing: the petition, the creditor list, and the schedules of assets, income, liabilities, and creditors.
• The automatic stay begins on filing and halts most collection activity (11 U.S.C. § 362).
• A meeting of creditors is held under section 341 of the Bankruptcy Code.
• A financial management course must generally be completed after filing, before a discharge is entered.
• Discharge, then the case is closed.

What does bankruptcy not reach?

This is where most misunderstanding lives. A discharge generally removes your personal liability for debts incurred before your case was filed — but not all debts, and not all creditor rights.

Congress wrote a long list of exceptions to discharge into 11 U.S.C. § 523. It excepts certain taxes and customs duties, including taxes for which a required return was never filed and taxes involving a fraudulent return or a willful attempt to evade. It excepts debts for money, property, or credit obtained by false pretenses, false representation, or actual fraud. It excepts debts that were neither listed nor scheduled in time for the creditor to act.

Secured debt is the other limit. A creditor with a lien on property — your mortgage lender on your home, for example — may foreclose or pursue state law remedies notwithstanding the discharge, though that creditor is precluded from seeking a money judgment against you personally for any deficiency (COB official material — Guide for Debtors Filing Bankruptcy Without an Attorney).

How is Chapter 7 different from Chapter 13?

Both are consumer chapters, and both end in a discharge, but the route and the timing differ. Chapter 7 is the liquidation route: in a Chapter 7 case the discharge is granted after the deadline passes for creditors to object, which is generally 60 days after the date first set for the meeting of creditors (U.S. Bankr. Ct. D. Ariz., Choosing Your Chapter). One court describes a typical Chapter 7 timeline as roughly four to six months from filing to discharge (Bankr. D. Md. official guidance).

Chapter 13 is the repayment route. It is available to an "individual with regular income," meaning someone whose income is sufficiently stable and regular to enable payments under a plan (11 U.S.C. § 101). In a Chapter 13 case the discharge is granted only after you complete all payments called for by your plan.

The fees also differ, and both chapters carry more than one.

Where does state law change the answer?

Bankruptcy is federal, but it does not float free of state law. Two places matter most to an ordinary consumer case.

The first is what property the estate reaches and what you keep. Filing creates an estate, and the Bankruptcy Code invalidates many restrictions on transfer so that the debtor's interests become property of the estate — but it preserves restrictions on a spendthrift trust to the extent that restriction is enforceable under nonbankruptcy law (11 U.S.C. § 541). Exemption amounts themselves are set state by state, and we publish verified figures only where we have them.

The second is local court practice. Each district has its own local rules, its own forms, and its own filing procedures, and those local rules govern alongside the Bankruptcy Code and the Federal Rules of Bankruptcy Procedure (W.D. Okla. LBR 1001-1). Districts also differ on mechanics — Maryland, for example, lets pro se individuals submit a Chapter 7 petition through an online eSR tool.

What do people most often get wrong about it?

Three misconceptions come up repeatedly in the courts' own pro se materials.

First, that a discharge wipes out everything. It does not. All debts are dischargeable unless a specific provision of the Bankruptcy Code defines them as nondischargeable, and that list is long — domestic support obligations and student loans among them (U.S. Bankr. Ct. D. Ariz., Choosing Your Chapter; COB official material).

Second, that a dismissal is the same as a discharge. It is the opposite. When a case is dismissed, the automatic stay ends and creditors may begin collecting again; an order of dismissal itself does not free the debtor from any debt (U.S. Bankr. Ct. M.D. Ala., Consumer Pro Se Debtors Guide).

Third, that filing without a lawyer is routine. Individuals may represent themselves, but courts describe doing so successfully as extremely difficult, and note that a misstep — such as failing to file a credit counseling certificate — may cost you protections in a later case (Bankr. N.D. Ill. official page — Filing Without an Attorney).

Frequently asked questions

Does filing bankruptcy stop wage garnishment?

Filing the petition automatically prevents, or "stays," debt collection actions against the debtor and the debtor's property. As long as the stay remains in effect, creditors cannot bring or continue lawsuits, make wage garnishments, or even make telephone calls demanding payment (11 U.S.C. § 362). The stay can be lifted by the court on request, and it ends if the case is dismissed.

What is a discharge, exactly?

A discharge is a court order stating that you have been relieved of your obligation to pay your dischargeable debts. It also operates as a permanent injunction on collection of those debts, and it prohibits creditors from contacting you about them. It does not eliminate a mortgage or security interest in property that you granted to a lender.

How much does it cost to file?

Court fees are set nationally. Chapter 7 carries a $245 statutory filing fee (28 U.S.C. § 1930(a)(1)(A), (f)(1)), a $78 administrative fee, and a $15 trustee surcharge. Chapter 13 carries a $235 filing fee (28 U.S.C. § 1930(a)(1)(B)) plus the same $78 administrative fee. Attorney fees are separate and are not set by the court.

Can I file if I cannot afford the filing fee?

There are two statutory routes, and they differ by chapter. The Chapter 7 fee waiver is conditional under 28 U.S.C. § 1930(f) and Judiciary procedures. For Chapter 13, the statute permits installment payment for an individual commencing a voluntary or joint case, but the Chapter 7 waiver does not apply. Courts handle applications for both.

Is a bankruptcy filing public?

Yes. The documents filed in a bankruptcy case are a matter of public record and can be reviewed by members of the general public at the clerk's office during regular business hours, or online through PACER (Bankr. N.D. Iowa official page — FAQs). Certain items are protected — a debtor's statement about their Social Security number is docketed but not available for public inspection.

Do I have to hire a lawyer?

Individuals may represent themselves in bankruptcy court, but corporations and partnerships must have an attorney to file a case (Bankr. W.D. La. official page — Don't Have an Attorney). Courts describe pro se filing as extremely difficult to do successfully because the rules are technical and a misstep may affect your rights. Court employees and judges are prohibited by law from giving legal advice.

What is the difference between being dismissed and being discharged?

A dismissal ends the case without relieving you of debt. Upon dismissal the automatic stay ends, allowing creditors to begin collecting on debts that were not discharged, and an order of dismissal itself will not free the debtor from any debt. A discharge is the opposite: a court order releasing you from personal liability on covered debts.

Does bankruptcy cover business debts too?

The Code defines "person" to include individuals, partnerships, and corporations, so businesses can be debtors, but the chapters and rules that apply to corporations, partnerships, and LLCs are very different. Those entities do not receive discharges and are not eligible for Chapter 13, and they must be represented by an attorney. This page addresses consumer cases.

Sources

• 11 U.S.C. § 109 — Who may be a debtor · official source
• 11 U.S.C. § 101 — Definitions · official source
• 11 U.S.C. § 362 — Automatic stay · official source
• 11 U.S.C. § 523 — Exceptions to discharge · official source
• 11 U.S.C. § 541 — Property of the estate · official source
• 28 U.S.C. § 1930(a)(1)(A), (f)(1) — Chapter 7 filing fee
• 28 U.S.C. § 1930(a)(1)(B) — Chapter 13 filing fee
• Bankruptcy Court Miscellaneous Fee Schedule, Item 8 — Administrative fee
• Bankruptcy Court Miscellaneous Fee Schedule, Item 9 — Chapter 7 trustee surcharge
• Bankr. D. Md. official page — Legal Overview — Legal Overview
• U.S. Bankr. Ct. D. Ariz., Choosing Your Chapter: What can Bankruptcy do for you? What will it do to you? — Choosing Your Chapter
• COB official material — Guide for Debtors Filing Bankruptcy Without an Attorney — Guide for Debtors Filing Bankruptcy Without an Attorney (D. Colo.)
• U.S. Bankr. Ct. M.D. Ala., Consumer Pro Se Debtors Guide — Consumer Pro Se Debtors' Guide (M.D. Ala.)
• Bankr. N.D. Ill. official page — Filing Without an Attorney — Filing Without an Attorney
• Bankr. W.D. La. official page — Don't Have an Attorney — Don't Have an Attorney
• Bankr. N.D. Iowa official page — FAQs — FAQs
• Bankr. D. Minn. official page — Who is the “Debtor”? [https://www.mnb.uscourts.gov/content/who-%E2%80%9Cdebtor%E2%80%9D] — Who is the "Debtor"?
• W.D. Okla. LBR 1001-1 — Scope of Rules and Forms; Definitions
• Fed. R. Bankr. P. 1001 — Scope; Title; Citations

Related

• Chapter 7
• Chapter 13
• The automatic stay
• Which debts get discharged
• Secured vs unsecured debt
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