There are several kinds of bankruptcy, depending on who you are and what you want to do. You've probably heard of "Chapter 11"-named for the part of the United States Code where it's located. This applies to corporations that wish to reorganize their finances and remain in business. People with extremely high debts may also be eligible for this kind. There's also a special kind of bankruptcy for family farmers called a "Chapter 12." There are two kinds of bankruptcy for people, rather than companies and family farmers-the "Chapter 7" and the "Chapter 13."
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The theory behind a Chapter 7 is to allow people to liquidate. It's kind of like a going out of business sale for people. People give everything they own to a trustee appointed by the court. The trustees are often bankruptcy lawyers in private practice. Some do this as a small sideline. Others devote much of their time to this work.
The trustee then sells all the property and gives the money to the creditors, as far as it goes. If there's not enough money to pay off the debts, so be it. There is a court order that the debtor no longer owes anything to the creditor and there's nothing the creditor can do about it. This is the discharge order, that the debtor is discharged from any other obligation to pay.
That's the theory. In real life, most people who file a Chapter 7 don't lose anything to the court. That's because although bankruptcy is covered by federal law, state law allows people to keep certain items safe from their creditors. This varies, of course, from state to state.
A Chapter 13 bankruptcy is a way for a person to reorganize the debts. It's like the Chapter 11 that corporations use to avoid going under completely and to keep operating. They are protected from their creditors while working out a way to restructure their financial situation.
Chapter 13 works that way for people. They come up with a plan for paying back their creditors for the next three to five years. The 2005 law requires more people to pay for the longer period. Under this kind of bankruptcy, debtors get to keep their property because they're paying back their creditors.
Bankruptcy law is a relatively modern invention. Be thankful you don't live in a time of workhouses and debtors' prisons!
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