Bankruptcy Law – What You Need to Know About Bankruptcy

The law prevents economic enslavement by giving individuals or businesses the opportunity to reorganize their debts. Bankruptcy cases are handled by Federal Courts. Federal Court rulings have the force of law under the Supremacy Clause of the Constitution.


A debtor may exempt certain property from unsecured creditors, such as the equity in his home or the tools of the trade used for his profession. The bankruptcy trustee will liquidate the remaining nonexempt assets and distribute them to creditors.

What is Bankruptcy?

Bankruptcy is a legal process by which debtors can eliminate many types of unsecured debt, including credit card and medical bills. The bankruptcy law also provides protections for debtors by stopping lawsuits and limiting creditors’ access to property.

The commencement of a bankruptcy case creates a “debtor’s estate.” The debtor’s estate includes all legal and equitable interests in property as of that date, except those properties that the Bankruptcy Code or applicable state law exempt from liquidation. Creditors’ unsecured claims are paid from the assets of the debtor’s estate.

Certain debts cannot be eliminated in bankruptcy, such as a mortgage on the debtor’s principal residence, debts for alimony and child support, tax debt, debts for most government funded or guaranteed educational loans and benefit overpayments, certain student loan debt and debts arising from death or personal injury caused by driving while under the influence of alcohol or drugs. Debts that are nondischargeable may be challenged by a creditor who believes the debtor obtained the debt by fraud, false pretenses or breach of fiduciary duty in obtaining the loan or pledged property.

Bankruptcy judges rely on many substantive laws, including federal and foreign law on debtor/creditor and commercial matters. They also use published case law to interpret the provisions of the Bankruptcy Code and other substantive laws. Court decisions can provide helpful guidance for debtors and creditors alike.

What are the Benefits of Bankruptcy?

If you’re dealing with debt that’s overwhelming and struggling to pay your bills, bankruptcy can provide a fresh start. The benefits of filing bankruptcy include a stay against creditors and collection agencies and the opportunity to build a repayment plan.

Bankruptcy may also save your home from foreclosure or your car from repossession. You can catch up on secured debt payments in your repayment plan and get rid of unsecured debts that you cannot afford to repay.

A reputable bankruptcy attorney can help you decide if this is the right route for you. You must make a commitment to stick with your repayment plan, and a judge will look at your financial situation before approving your bankruptcy. If you’re unable to keep up with your repayment obligations, you could end up back in court.

The bankruptcy process is complex, and it has a significant impact on your credit score. However, you can begin rebuilding your credit almost immediately after your debts are discharged. You’ll have to be careful not to re-enter into debt that you could not manage before the discharge, and you should consider taking on credit responsibly as soon as you’ve rebuilt your credit score.

A bankruptcy trustee will sell or distribute assets that you own in order to pay your creditors. Certain assets are protected, including household furniture and appliances, tools of the trade and cars up to a certain value.

What are the Disadvantages of Bankruptcy?

One disadvantage of bankruptcy is that it will have a negative impact on your credit score. However, this is temporary, and the debtor can start repairing his or her credit by making timely payments on bills after completing the bankruptcy process. Another disadvantage is that certain debts are not dischargeable in bankruptcy. These include student loans, alimony, child support, and most tax debts. It is also important to note that a debtor may lose some assets due to bankruptcy, such as property that is secured by collateral or a home with a mortgage.

Finally, it is important to note that a bankruptcy will appear on your credit report for 7-10 years. This will likely make it difficult to obtain new credit or a home loan in the future. Furthermore, it may be embarrassing for some individuals to admit they are struggling with debt, and bankruptcy carries a social stigma. However, it is important to remember that bankruptcy is a legal right and that financial difficulties can affect anyone.

Another disadvantage of bankruptcy is that a trustee will liquidate non-exempt assets to pay creditors. This can include a debtor’s house, vehicle, personal belongings, trade tools, and even some retirement accounts. However, some assets such as Social Security payments, unemployment compensation, and limited equity in a home, vehicle, or bank account are exempt from liquidation.

How Can Bankruptcy Help Me?

A bankruptcy filing is a serious decision that should only be undertaken after you’ve explored and failed to make progress with other debt relief options. Bankruptcy eliminates most types of consumer debt and may prevent the foreclosure of your home or repossession of your vehicle, and it stops wage garnishment, creditor harassment and disconnection of utilities. It will stay on your credit report for seven to ten years, but it can give you a fresh start in rebuilding your financial future.

The bankruptcy process is governed by federal law, but there are local rules that apply, depending on where you live. The bankruptcy courts in each of the 50 states, the District of Columbia and Puerto Rico have their own local rules, forms and opinions that impact how bankruptcy cases are handled.

Liquidation bankruptcy (Chapter 7) is typically used by individuals whose expenses exceed their income and who cannot pay their debts. A trustee will take control of your assets and sell them to pay your creditors, although you can keep certain items such as Social Security payments, unemployment compensation, limited equity in your home, a vehicle, household goods and appliances, trade tools and books.

A reorganization bankruptcy (Chapter 13) is designed to help you keep your property and repay some or all of your debt over a three- to five-year period. A trustee will oversee your case and collect payments from you, pay your creditors and ensure that you follow the terms of your repayment plan.