If you're unfamiliar with the bankruptcy system, you might think bankruptcy is a single process. However, there are several options for approaching the problem, and each process has its quirks. Let's look at how the different process works and which option a bankruptcy law firm might encourage you to pursue.

Restructuring

Depending on your circumstances, this will fall under the headings of Chapter 11, 12, or 13 bankruptcy laws. Chapter 11 covers businesses, Chapter 12 covers certain types of non-agribusiness farms, and Chapter 13 covers personal finances.

When you restructure, the goal is to reduce your debt load but continue to pay. You will have to submit a restructured payment plan to the court. The judge will want to see evidence that you have the means to pay according to your proposed plan. Likewise, your creditors will have the legal right to question you under oath.

In theory, a restructured plan could ask creditors to take a 100 percent haircut on the debt. However, you're supposed to pay what your finances allow. If it's within your means to do so, your plan should propose paying 80 percent of what you owe. Also, the plan must explain how you'll pay the adjusted amount within three to five years.

Liquidation

All liquidations take place under the Chapter 7 bankruptcy law. The liquidation of assets refers to the idea that things you own will be converted into money to pay your creditors. It's understood that someone filing Chapter 7 probably won't have enough assets to liquidate and then pay off all of their debts. The creditors will have to take a loss on the balance after the judge determines there's nothing left to sell.

Note that you only have to sell non-exempt assets. You're entitled to a certain number of exemptions. In all jurisdictions, practical items like a daily-driver car, clothes, furniture, utensils, and so forth. Some states also allow exemptions of even luxury items up to a few thousand dollars.

Why Not Both!

There are some scenarios where you might end up doing both. A common reason a bankruptcy law firm might recommend this is when someone wants to liquidate assets but they have secured assets. A secured asset is something like a mortgage or vehicle loan. If you only liquidate assets, all secured assets will be repossessed by your creditors. By doing consecutive filings under Chapter 7 and then 13, you may be able to hold onto a mortgaged house, for example.