Federal courts have been established specifically to help New York consumers and businesses overcome extraordinary financial problems. Attorneys help debtors determine which type of bankruptcy will result in the most beneficial outcome. Legal advisers also provide guidance about qualifications for bankruptcy, which differ from type to type.

For instance, a consumer may have too much income to qualify for Chapter 7 bankruptcy. Under Chapter 7, a debtor’s assets are sold to satisfy creditors. A court may decide to allow the debtor to keep some assets.

Chapter 13 bankruptcy is for consumers who have enough income to repay debt under a modified payment plan. The debtor must create a budget and a plan that are acceptable to a bankruptcy court, with a court-appointed trustee acting as the payment middleman and plan monitor. Businesses largely file Chapter 11 bankruptcy, which also involves debt restructuring and often includes trustee oversight.

Federal courts have the power to forgive or discharge debts acquired before a bankruptcy filing. There are some debts a court may not forgive including child support and alimony obligations, taxes and, under most circumstances, student loans.

Consumers sometimes don’t want a debt to be discharged. The individual decides he or she would rather keep the debt than risk losing property, like a vehicle, which is possible once a discharge occurs. The debtor can work out a modified repayment plan with a lender to reaffirm the debt, subject to a bankruptcy court’s approval.

Reaffirmation agreements are entirely voluntary, but a bankruptcy court has a say over whether the agreement is prudent. Hearings are held for debtors without legal representation to determine whether reaffirmation is beneficial. A debtor must abide by a bankruptcy court’s decision.

Debt discharge is not an option for consumers who fail to live up to reaffirmation agreements. An attorney can explain further what consequences are possible if reaffirmation repayment obligations are not met.

Source: U.S. Department of Justice, “Bankruptcy Information Sheet,” accessed Sep. 18, 2015