What is Bankruptcy?
Bankruptcy is one of the several alternatives for financial distress. Bankruptcy is an opportunity for a debtor to emerge out of a financial crisis and start afresh every year, declaring for bankruptcy is simply a fact of life for millions of individuals living in the United States.
Bankruptcy law is federal law, authorized by Article I, Section 8, and Clause 4 of the United States Constitution. Title 11 of the United States Code, the Bankruptcy Code contains the substantive law of bankruptcy.
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Generally, a debtor declares bankruptcy to obtain relief from debt, and this is accomplished either through a discharge of the debt or through a restructuring of the debt. Generally, when a debtor files a voluntary petition, his or her bankruptcy case commences.
Types of Bankruptcies
Chapter 7 is liquidation bankruptcy also known as straight bankruptcy; it is the simplest and quickest form of bankruptcy available.
Chapter 9 bankruptcy is the type of bankruptcy that is reserved for municipalities who reach financial trouble. It's a federal mechanism for the resolution of municipal debts.
Chapter 11 bankruptcy known as corporate bankruptcy and is a form of corporate financial reorganization which typically allows companies to continue to function while they follow debt repayment plans.
Chapter 12 bankruptcy is designed for adjustment of debts of "family farmers" or "family fishermen" with regular annual income. It is known as Family Farmer Bankruptcy / Family Fisher man Bankruptcy to propose and carry out a plan to repay all or part of their debts.
Chapter 13 bankruptcy is designed for an individual who is unable to reimburse his /her debts. It enables individuals with regular income to develop a plan to repay all or part of their debts. It is also known as Wage Earner Bankruptcy.
Chapter 15 bankruptcy is for helping both debtors and creditors. Intension of this is to provide effective mechanism for dealing with bankruptcy debtors and helps foreign debtors to clear debts.
Chapter 7 and Chapter 13 are the efficient bankruptcy chapters often used by most individuals. The chapters which almost always apply to consumer debtors are chapter 7, known as a "straight bankruptcy", and chapter 13, which involves an affordable plan of repayment. An important feature applicable to all types of bankruptcy filings is the automatic stay. The automatic stay means that the mere request for bankruptcy protection automatically stops and brings to a grinding halt most lawsuits, repossessions, foreclosures, evictions, garnishments, attachments, utility shut-offs, and debt collection harassment.
Chapter 7 Bankruptcy
Chapter 7 cases are generally consumer cases. These cases are filed by debtors who incurred debts for personal, family, or household purposes. Often more than not, these individuals are in dire financial situations with no realistic chance of repaying the debts within a reasonable time frame. Generally, the bankruptcy court may grant discharge of only those debts that are dischargeable. Examples of non-dischargeable debts include student loans, certain taxes, criminal fines, and spousal or child support.
It should be noted that the 2005 amendments to the Bankruptcy Code introduced the "means test" for eligibility for chapter 7. An individual who fails the means test will have his or her chapter 7 case dismissed or may have to convert his or her case to a case under chapter 13.
Generally, a trustee will sell most of the debtor's assets to pay off creditors. However, certain assets of the debtor are protected to some extent. For example, Social Security payments, unemployment compensation, and limited values of your equity in a home, car, or truck, household goods and appliances, trade tools, and books are protected. However, it should be noted that these exemptions vary from state to state. Therefore, it is advisable to consult an experienced bankruptcy attorney.
Chapter 13 Bankruptcy
Relief under Chapter 13 is available only to individuals with regular income whose debts do not exceed prescribed limits. If you're an individual or a sole proprietor, you are allowed to file for a Chapter 13 bankruptcy to repay all or part of your debts. Under this chapter, you can propose a repayment plan in which to pay your creditors over three to five years. If your monthly income is less than the state's median income, your plan will be for three years unless the court finds "just cause" to extend the plan for a longer period. If your monthly income is greater than your state's median income, the plan must generally be for five years. A plan cannot exceed the five-year limitation.
In contrast to Chapter 7, the debtor in Chapter 13 may keep all of his or her property, whether or not exempt. If the plan appears feasible and if the debtor complies with all the other requirements, the bankruptcy court will typically confirm the plan and the debtor and creditors will be bound by its terms. Creditors have no say in the formulation of the plan other than to object to the plan, if appropriate, on the grounds that it does not comply with one of the Code's statutory requirements. Generally, the payments are made to a trustee who in turn disburses the funds in accordance with the terms of the confirmed plan.
When the debtor completes payments pursuant to the terms of the plan, the court will formally grant the debtor a discharge of the debts provided for in the plan. However, if the debtor fails to make the agreed upon payments or fails to seek or gain court approval of a modified plan, a bankruptcy court will often dismiss the case on the motion of the trustee. Pursuant to the dismissal, creditors will typically resume pursuit of state law remedies to the extent a debt remains unpaid.
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