People and businesses can file for bankruptcy in order to resolve certain debts with creditors. It provides debtors with a “fresh financial start” and aids creditors in establishing their rights.
A bankruptcy filing usually prevents creditors from collecting debt amounts during the bankruptcy process. After the bankruptcy process is complete, they can resume collection efforts. The debt payment terms are often re-evaluated and reorganized as part of the bankruptcy process. This is known as an “automatic stay.”
What’s the Main Goal of Bankruptcy?
It is common for individuals to file for personal bankruptcy and companies for business bankruptcy when they are unable to pay existing debts, either in part or in full. Individuals or businesses file for bankruptcy to discharge their debts. The court issues a discharge order when a Chapter 7 proceeding is filed.
Under Chapter 7, individual debts can be discharged if the filer meets an income and means test.
Chapter 13 bankruptcy aims to discharge debts by following a payment plan. The remaining debt is discharged when a Chapter 13 debtor successfully completes the plan.
What Is the Bankruptcy Code?
Generally, bankruptcy filings by individuals, businesses, municipalities, and other entities are governed by the U.S. Bankruptcy Code. Numerous chapters and provisions make up this comprehensive set of laws. Most bankruptcy lawsuits are based on this branch of law, which is one of the more complicated branches of law in the United States.
Chapters 7 and 13 of the bankruptcy code are two of the most commonly cited chapters. Chapter 7 governs “liquidation” bankruptcy, which essentially lets the person start over by canceling most of their debts. “Reorganization bankruptcy”, also known as Chapter 13, allows the party to reorganize their finances before paying their outstanding debts.
What Is Bankruptcy Court?
Bankruptcy is familiar to most people. It may seem like a solution to their money problems. Bankruptcy, however, can be more complicated than it appears. Getting out of debt is not a quick fix.
There have been well over half a million bankruptcy filings in recent years. It is not well known that a separate court system handles bankruptcy cases.
The United States Constitution authorizes bankruptcy laws. These laws have been passed and amended repeatedly by Congress. Bankruptcy courts administer bankruptcy laws. Federal bankruptcy courts are part of the court system.
The United States has almost 100 federal districts. Bankruptcy courts are located in each federal district.
Bankruptcy court judges can decide any matter connected to a bankruptcy case. Debtors may want to know if they are eligible to file for bankruptcy and if they can discharge their debts.
Different Types of Bankruptcy
Debtors may qualify for several types of bankruptcy. A bankruptcy filing, however, can potentially do more harm than good if it is not done properly. According to the type of bankruptcy filed, an individual’s debt may fall under an exception and remain.
Bankruptcies are filed under three main chapters of the Bankruptcy Code. Consumer bankruptcy filings under Chapter 7 account for 65% of all bankruptcy filings.
Among the most common types of bankruptcy are:
- Chapter 7;
- Chapter 11; and
- Chapter 13.
Additionally, there are three less common types of bankruptcy:
- Chapter 9;
- Chapter 12; and
- Chapter 15.
Bankruptcy cases can only be heard in federal courts. A bankruptcy case cannot be filed in a state court. Following are the different types of bankruptcy.
A Chapter 7 bankruptcy is also known as liquidation bankruptcy. Most of an individual’s property will have to be surrendered to pay off their debts in this type of bankruptcy. In order to repay creditors, a trustee oversees the individual’s assets and sells them.
Property that is exempt from taxation may be kept by an individual. Some types of debts, however, are not dischargeable. If an individual engages in fraudulent behavior, including concealing financial records, their debts will not be discharged.
Non-dischargeable debts include:
- Student loans;
- Spousal support;
- Child support; and
- Some taxes.
Chapter 13 bankruptcy, or reorganization bankruptcy, allows individuals to keep some of their property and arrange an affordable payment plan to pay their debts. Individuals with higher incomes usually choose this option.
A Chapter 11 bankruptcy, also known as reorganization bankruptcy, is commonly used by commercial enterprises to repay their debts. A reorganization bankruptcy allows the entity to continue operating. Certain contracts and obligations may be able to be withdrawn by the business.
Chapter 9 bankruptcy is only available to municipalities, including cities and towns. While the municipality creates a plan for adjusting its debts, it is protected from its creditors.
Reorganizing a municipality’s debts usually involves:
- Extending debt maturities;
- Reducing the amount of principal or interest; or
- Refinancing debt by obtaining new loans.
In Chapter 9 bankruptcies, the municipality’s assets are not liquidated, and the sale proceeds are not distributed to creditors. The 10th Amendment to the United States Constitution guarantees state sovereignty over their internal affairs.
As a result of these limitations, bankruptcy courts do not manage municipal bankruptcy cases as actively as they do other types. Generally, the court will affirm a Chapter 9 petition only if the debtor meets the eligibility requirements, confirms the debt adjustment plan, and ensures that the plan is implemented.
In Chapter 12 bankruptcy, a family farm and fishermen are reorganized. A family farm may be owned by an individual, a corporation, or a partnership.
For individuals, Chapter 12 has several requirements, including:
- Commercial fishing or farming must be their occupation;
- For farmers, the debt limit cannot exceed $3.2 million, and for fishermen, it cannot exceed $1.5 million;
- At least 50% of the farm’s debt must come from the farm. In the case of fishermen, it must be 80%; and
- Farming or fishing must generate at least 50% of their gross income.
Corporations and partnerships must meet more stringent qualifications. As a result of the automatic stay in a Chapter 12 bankruptcy, both the farmer and third parties who are liable for the debt are protected from creditors.
A new chapter of bankruptcy, Chapter 15, was added in 2005 as a result of the Bankruptcy Abuse Prevention and Consumer Protection Act. It provides mechanisms for handling insolvency cases involving more than one country, as well as debtors, assets, claimants, and other parties of interest. Chapter 15 bankruptcy may be available to U.S. military personnel living abroad.
How to File for Bankruptcy
To begin the process, the debtor must file a bankruptcy petition with a federal bankruptcy court.
The following forms are included in this collection:
- Liabilities; and
- Additional information as required by the court.
Upon filing, a judge will review the petition and determine whether the debtor is eligible to declare bankruptcy. No later than 14 days after filing the petition, any additional forms or documents must be submitted to the court. A court trustee will hold a meeting of creditors if the court grants the petition.
Debtors will attend this meeting to discuss their property and debts with the court trustee. Also, debtors should file any objections or motions they have against creditors’ claims and complete repayment plan forms.
The debtor must complete a second debtor education course before their debts can be discharged. After completing all of these steps, the court will either issue a discharge order or dismiss the petition. Those who receive a discharge order are no longer obligated to pay their pending debts. In addition, the order removes creditors’ collection rights, which acts as a protection measure.
Should I Contact a Bankruptcy Attorney?
Any bankruptcy court issues you may have require the assistance of an experienced bankruptcy lawyer. An attorney can determine whether or not you are eligible for bankruptcy and which chapter suits your needs if you are considering bankruptcy. A bankruptcy attorney can also explain possible exemptions and outcomes.
In any court, it is always a good idea to have an attorney representing you. During bankruptcy proceedings, your attorney will assist you with preparing all bankruptcy documents, filing the petition, and representing you in court. There are a lot of complex bankruptcy laws and they are constantly changing. A lawyer will help you obtain the best outcome for your case.
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