The 1.53 million Americans who filed personal bankruptcies in 2010 is a clear indication of the bad economic situation suffered by many individuals and families in the US. Besides loss of job, a direct effect of poor economy, an accident or illness requiring medical treatment, which has also become too costly, divorce, and other events have contributed to diverting all funds to basic needs rather than to paying monthly bills, mortgage or debts. The downside of this, of course, is the accumulation of debts that eventually become quite impossible to settle.

To protect their interests, creditors usually refer bad debts (debts that have not been paid for at least three consecutive months) to collection firms which, in turn, employ harassing tactics to force the debtors to pay.

Suffering from overwhelming debts, however, is never a total ruin to an individual’s or a business’ financial future. As explained in the website of the Bradford Law Offices, PLLC, individuals and businesses in the United States actually have a number of different available options for returning to financial freedom, including bankruptcy. Many people only associate bankruptcy with negative consequences. However, in reality, it provides debtors with an invaluable tool for restoring order to their finances.

The U.S. Bankruptcy Code contains chapters designed to save debtors from debts that have become quite impossible to manage. Each chapter is meant to address debtors’ specific financial situation, and basically aimed at eradicating all forms of debts for the individual’s or business’ fresh financial start. The Bankruptcy Code offers:

  • Chapter 7 bankruptcy – a liquidation bankruptcy wherein a court-appointed trustee sells some of the “non-exempt” assets and properties surrendered by the debtor (there are exempt properties, like the home, which the debtor can keep and protect). The proceeds from the sale are distributed to the creditors and the remaining amount (if there is any) will be returned to the owner.
    • The debts to be paid in this chapter are the non-dischargeable debts (usually government-related debts). Debts from which the court can decide to free the debtor can include credit card bills, medical bills, past utility bills, personal loans, and so forth.
  • Chapter 11 or business bankruptcy – allows the business firm to either restructure its finances (repayment plan) for more affordable payments, or liquidate some of its properties to be able to pay creditors. Unlike in chapter 7, wherein a business will have to cease operations, chapter 11 allows a firm to stay in business.
  • Chapter 12 – is designed for family farmers and family fishermen which should have a regular annual income to be considered eligible under this law. which own and operate the fishing or farming business; which own at least 50% of the farming/fishing business; and, which earns a regular annual income.
  • Chapter 13 – which is reorganization or restructuring bankruptcy, requires debtors to design a debt payment scheme spanning to three years (can be five years if the court so allows). Under this chapter, all of the debtor’s properties are saved or never sold.

A realistic and objective assessment of a debtor’s financial condition is required regardless of the chapter of bankruptcy the debtor wishes to file. Making sure, therefore, that the lawyer, who will be hired to defend the rights and interests of debtors, is very significant.