Bankruptcy FAQs

Bankruptcy is a legal process, supervised by federal courts, that help individuals or businesses who cannot repay their debts get a financial “fresh start”. The process involves either the liquidation of assets to pay creditors or the creation of a court-approved repayment plan.

If you don’t know who you owe or how much, start by gathering records: bank statements, emails, contracts, bills, and credit reports. Contact your bank or credit bureau to request a full list of accounts and balances. Review past payments to identify recurring creditors. If debts may be old or disputed, ask for written verification before paying anything. For taxes, request transcripts from the tax authority.

The main types of bankruptcy are:

  • Chapter 7 (Liquidation): Eliminates most unsecured debts by selling non-exempt assets. Typically for individuals or businesses with limited income.
  • Chapter 11 (Reorganization): Allows businesses (and some individuals) to restructure debts while continuing operations.
  • Chapter 13 (Wage Earner’s Plan): For individuals with regular income; debts are repaid through a 3–5 year court-approved plan.
  • Chapter 9: For municipalities (cities, towns, school districts) to reorganize debts.
  • Chapter 12: Designed for family farmers and fishermen with regular income.
  • Chapter 15: Handles cross-border insolvency cases involving debtors with assets or creditors in multiple countries.

Each chapter serves different financial situations and eligibility requirements.

Generally, no. Once you file for bankruptcy, an automatic stay immediately goes into effect. This legally requires most creditors to stop calling, sending letters, filing lawsuits, garnishing wages, or otherwise trying to collect debts. If a creditor continues to harass you after being notified of your filing, they may be violating federal law and could face penalties. Some limited contacts may still occur for non-dischargeable debts or court-approved reasons, but harassment should largely stop.

Chapter 7 and Chapter 11 bankruptcy differ mainly in purpose and process.

Chapter 7 is a liquidation bankruptcy, typically used by individuals or small businesses. A court-appointed trustee sells non-exempt assets to pay creditors, and most remaining unsecured debts are discharged. It is usually faster and less expensive, but debtors may lose property.

Chapter 11 is a reorganization bankruptcy, most often used by businesses but sometimes by individuals with large debts. The debtor usually keeps control of assets and proposes a court-approved plan to restructure debts and repay creditors over time. Chapter 11 is more complex, costly, and lengthy, but it allows the business to continue operating.

In short, Chapter 7 wipes out debt through liquidation, while Chapter 11 restructures debt to allow continued operations.

An automatic stay is a legal protection that goes into effect immediately when you file for bankruptcy. It temporarily stops most collection actions against you, including creditor lawsuits, wage garnishments, bank levies, foreclosure proceedings, and collection calls. The purpose of the automatic stay is to give you financial breathing room while the bankruptcy case is reviewed and to ensure creditors are treated fairly under bankruptcy law. Some actions, such as certain child support obligations or criminal proceedings, are not stopped. If a creditor violates the automatic stay, the court may impose penalties.

  • Alternatives to bankruptcy include several options depending on the type and amount of debt. Individuals may pursue debt negotiation or settlement, where creditors agree to accept less than the full balance. A debt management plan through a credit counseling agency can reduce interest rates and combine payments. Debt consolidation replaces multiple debts with one loan, while loan modifications or forbearance can lower or pause payments temporarily. Selling assets or increasing income can also help resolve debt without court involvement.
  • For businesses, alternatives include out-of-court restructuring, renegotiating terms with lenders or suppliers, assignment for the benefit of creditors (ABC) to liquidate assets privately, or a voluntary wind-down of operations. These options may preserve credit, reduce costs, and avoid the public and legal consequences of bankruptcy.

If a loan is secured, the lender’s rights to the collateral generally survive bankruptcy discharge. While a discharge eliminates the borrower’s personal obligation to repay the debt, it does not remove the lender’s lien on the secured property. As a result, if the borrower fails to continue making required payments or otherwise defaults after discharge, the lender may still enforce its security interest by repossessing or foreclosing on the collateral, subject to applicable law. The key distinction is that the lender cannot pursue the borrower personally for any remaining balance after discharge, but it can act against the property itself. To retain the collateral, the borrower typically must stay current on payments or enter into a reaffirmation or similar agreement where permitted.

In a Chapter 11 bankruptcy involving a business, the debtor typically continues to run the business as a “debtor in possession.” Management remains in control of day-to-day operations while the case is pending, exercising most of the powers and duties of a bankruptcy trustee. A trustee is appointed only in limited circumstances, such as fraud, gross mismanagement, or failure to comply with court requirements.

A Chapter 11 trustee is a court-appointed individual who takes control of a company undergoing a Chapter 11 bankruptcy reorganization. Normally, the company’s existing management continues to run the business as a “debtor in possession.” However, if the court finds evidence of fraud, gross mismanagement, incompetence, or conflicts of interest, it may appoint a Chapter 11 trustee to replace management.

The trustee’s role is to operate the business, protect the bankruptcy estate, and act in the best interests of creditors and other stakeholders. This includes managing day-to-day operations, investigating the debtor’s financial affairs, pursuing claims or recoveries, and proposing a plan of reorganization or liquidation. The trustee owes fiduciary duties to the estate and is supervised by the bankruptcy court and the U.S. Trustee.

After filing Chapter 11, a debtor typically obtains funding through debtor-in-possession (DIP) financing. With court approval, the debtor can borrow new money from existing or new lenders to fund operations during the bankruptcy. DIP lenders receive special protections—such as priority repayment, liens, or superpriority claims—which reduce risk and encourage lending while the debtor restructures.

 

Under U.S. Bankruptcy Code §1121, the debtor has the exclusive right to file a Chapter 11 plan during the initial exclusivity period. After that period expires (or is terminated), any party in interest may file a plan, including a creditors’ committee, individual creditors, equity security holders, or a trustee, if one has been appointed.

A Chapter 11 plan is accepted when each impaired class of creditors or equity holders votes to approve it by at least two-thirds in dollar amount and more than one-half in number of allowed claims or interests voting in that class. If one or more impaired classes reject the plan, the court may still confirm it through cramdown if the plan is fair, equitable, and does not unfairly discriminate.