The Bankruptcy Code is designed to provide relief to people and businesses in financial distress. Although bankruptcy can benefit some people, a person cannot obtain these benefits without assuming certain duties. If after considering the benefits and burdens associated with bankruptcy you want to obtain the relief provided by the Bankruptcy Code, you must file a petition and a list of all your debts and your property, together with the appropriate filing fee, with the Federal Bankruptcy Court. These lists of debts and property must be prepared on forms approved by the court. It is very important that these lists of debts and property are accurate and complete in all respects. You may file either an individual bankruptcy petition or a joint bankruptcy petition with your spouse.

There are four types of bankruptcies available to individuals: a Chapter 7 liquidation, a Chapter 11 reorganization, a Chapter 12 adjustment of debts for family farmers only, and a Chapter 13 adjustment of debts.

A Chapter 7 liquidation, the most common, allows an individual to obtain a discharge, which relieves the debtor from any debts owed as of the date that the bankruptcy petition is filed. Creditors then will be unable to try to collect those debts or sue the individual and obtain a valid judgment. With a few exceptions, the creditors have no claim on the individual's income or future assets. Certain debts are "nondischargeable" which means that a bankruptcy will not excuse them. "Nondischargeable" debts include child support, alimony, federal taxes, student loans, payment of a fine in a criminal case, and debts arising from the commission of a willful wrongful act.

Once you have filed, the court will set a date for an appearance which is called the "meeting of creditors." The court will notify you and all of your creditors of the time and place of the meeting and you will be required to attend. When a bankruptcy case is filed, an estate is created comprised of all your property as of the date the bankruptcy petition is filed. The judge will appoint a trustee who will act as the representative of your estate. The trustee's duty is to take possession of your property, to examine claims, creditors may file and determine whether they are proper, and to sell the property of your estate in order to reduce it to cash for distribution to your creditors. It is also the duty of the trustee to determine whether you have properly listed all of your assets, whether you are entitled to a discharge of your debts, or whether there is some reason why he or she should ask the bankruptcy judge to deny your discharge.

You should understand that in some few cases the trustee or a creditor may object to your eligibility to receive a discharge of your debts. If the trustee or a creditor objects to the discharge of a debt, for example, on the basis that the debt arose through the debtor's fraud, then the creditor would actually have to prove the case before the bankruptcy judge as with any other lawsuit. If there is no objection to the dischargeability of a particular debt, then it will be discharged. There are also instances where a discharge will be denied as to all debts for example, where the debtor has purposely concealed records from the trustee in order to hide assets.

If you have been permitted to have your debts discharged, you must turn over to the bankruptcy trustee all of your property except for certain assets which the law allows you to keep as "exempt." For example in Florida, an individual may keep up to $1,000 in personal property and $1,000 of their interest in a motor vehicle. As a general rule $136,000.00 equity in an individual's home is also considered exempt, but bankruptcy does not wipe out most mortgages. If an individual wants to keep his or her house, generally he or she must continue the payments on the mortgage in a Chapter 7, but can strip a second mortgage where the real property is worth less that the first mortgage in a Chapter 13.

Chapter 7 will be allowed if you pass the "means test," which means that your average income over the last 6 months adjusted for allowable expenses is less than the median income for a household with the same number of members in the county in which you live. If you do not qualify, then you can be forced into a bankruptcy under Chapter 13

A Chapter 13 adjustment of debts enables an individual with regular income to propose in good faith to pay all or part of his or her debts from future income over a period of time. If the court approves the plan of payment, the debts may be settled in this manner, even if the creditors are not willing to go along with the plan. If the individual makes the payments as required, he or she will not have to surrender his or her property.

Chapter 12 is similar to Chapter 13 but Chapter 12 is designed to be used only by family farmers with regular income, and it gives them a chance to reorganize their debts and keep their land.

Mortgages can now be modified during a bankruptcy.

How does bankruptcy affect your credit rating? The fact of bankruptcy is picked up and noted by various commercial credit reporting companies. Federal law limits the length of time this information may be carried on a report. The law also prevents certain governmental units and agencies and employers from discriminating against persons who have filed bankruptcy. Most people find that if, after discharge in bankruptcy, they have a higher credit standing than they did before filing. If they promptly make the payments that they are left with such as car payments, house payments, rent or utility payments, they can reestablish good credit in about two year's time.