Most individuals have heard of bankruptcy. It may appear to be a solution to their money problems. However, bankruptcy can be more complicated that it seems. It is not a quick fix to get out of debt for free.

In recent years, there have been well over half a million Americans that have filed for bankruptcy. Most people do not realize that there is a separate court system to handle bankruptcy cases.

The United States Constitution authorizes laws regarding bankruptcy. Congress has passed and repeatedly amended these laws.

Bankruptcy courts are set up to administer the bankruptcy laws. Bankruptcy courts are part of the federal court system.

There are almost 100 federal districts in the United States. Each federal district has its own bankruptcy court.

Bankruptcy court judges have the authority to decide any matter that is connected to a bankruptcy case. This may include issues such as whether an individual is eligible to file for bankruptcy and whether a debtor should be permitted to discharge their debts.

What are the Different Types of Bankruptcy?

There are several different types of bankruptcy for which debtors may qualify. It is important to note, however, that filing for bankruptcy can potentially do an individual more harm than good if it is not done correctly. The debt an individual was hoping to get rid of may fall under an exception and still remain, depending on the type of bankruptcy they file.

The majority of bankruptcies are filed under the three main chapters of the Bankruptcy Code. As many as 65% of individual consumer bankruptcy filings are filed under Chapter 7. The most common types of bankruptcy include:

There are also three less common types of bankruptcy, including:

  • Chapter 9;
  • Chapter 12; and
  • Chapter 15.

Only federal courts are permitted to hear bankruptcy cases. In other words, a bankruptcy case cannot be filed in a state court. The different types of bankruptcies will be discussed in the following paragraphs.

Chapter 7 bankruptcy is also called a liquidation bankruptcy. In this type of bankruptcy, an individual will be required to give up most of their property to pay off their debts. A trustee oversees the individual’s assets and sells them to pay back creditors.

An individual is permitted to keep certain property that is exempt property. However, there are certain types of debts that are non-dischargeable. For example, if an individual engages in fraudulent behavior, including concealing financial records, their debts will note be discharged. Other types of debt that are non-dischargeable include:

  • Student loans;
  • Spousal support;
  • Child support; and
  • Some taxes.

Chapter 13 bankruptcy, or reorganization bankruptcy, permits an individual to keep some of their property and make a payment plan to pay their debts at an affordable rate. This option is typically for individuals with higher incomes.

Chapter 11 bankruptcy, which is also a reorganization bankruptcy, is usually used by commercial enterprises to pay off their debts. This type of bankruptcy allows for the reorganization of the entity so they can continue their business. It may provide the business with the possibility of withdrawing from certain contracts and obligations.

Chapter 9 bankruptcy applies only to municipalities, including cities and towns. It provides the financially distressed municipality protection from its creditors while it creates a plan for adjusting its debts. The reorganization of the debts of a municipality is usually accomplished by:

  • Extending debt maturities;
  • Reducing the amount of principal or interest; or
  • Refinancing debt by obtaining new loans.

Chapter 9 bankruptcies are different from other chapters because there is no provision for liquidation of the assets of the municipality and distribution of the proceeds of the sales to creditors. Such a provision would violate the 10th Amendment to the United States Constitution that provides states with sovereignty over their internal affairs.

Due to these limitations, a bankruptcy court is not as active in managing a municipal bankruptcy case as in others. In Chapter 9 cases, the court generally only affirms the petition if the debtor is eligible, confirms the plan of debt adjustment, and ensures the implementation of that plan.

Chapter 12 bankruptcy is for the reorganization of a family farm and fishermen. A family farm may be classified as an individual, a corporation, or a partnership. There are several requirements for a Chapter 12, including, for individuals:

  • They must engage in commercial fishing or farming;
  • The debt limit cannot exceed $3.2 million for farmers and $1.5 million for fishermen;
  • Family farms must have at least 50% of the debt coming from the farm. For fisherman it must be 80%; and
  • At least 50% of their gross income must be from the farming or fishing operation.

The qualification requirements for corporations and partnership are more extensive. The automatic stay in a Chapter 12 bankruptcy protects both the farmer and third parties who are liable on the debt from creditors.

Chapter 15 bankruptcy is a new chapter as of 2005 that was added pursuant to the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005. It provides mechanisms for handling insolvency cases involving more than one country as well as debtors, assets, claimants, and other parties of interest therein. United States military personnel living abroad may be eligible for Chapter 15 bankruptcy.

Should I Hire a Bankruptcy Attorney?

It is important to have the assistance of a bankruptcy attorney in bankruptcy court. Partnerships and corporations are required by law to have attorneys in order to file for bankruptcy.

An individual, however, is permitted to represent themselves in bankruptcy court. While some individuals may do so in an attempt to save money, the bankruptcy court itself strongly recommends individuals hire an attorney when filing for bankruptcy.

The rules in bankruptcy cases are extremely technical. A simple mistake or omission can severely affect an individual’s rights. For example, if a debtor forgets to rile a required document, their entire case may be dismissed.

Additionally, bankruptcy cases are randomly audited to check for completeness of information provided. If any information is found to be inaccurate, an individual may be prosecuted for bankruptcy fraud.

There are also hidden dangers in bankruptcy that an individual must consider. It is common for individuals who are not familiar with bankruptcy laws to lose their cases simply because they were not aware of a local court rule or not aware that they had to be the one to schedule a hearing.

Do I Need an Attorney for Bankruptcy Court?

As discussed above, it is essential to have the assistance of an experienced bankruptcy lawyer for any bankruptcy court issues you may have. If you are deciding whether or not to file for bankruptcy, an attorney can review your situation and determine if you are eligible and what chapter would best fit your needs. Your attorney can also explain possible exemptions and outcomes of a bankruptcy.

As with any type of court, it is always advisable to have an attorney representing you. Your attorney will assist you in preparing all bankruptcy documents, filing the petition, and represent you during court proceedings. Bankruptcy laws are complex and ever-changing. Having a lawyer on your side will help you obtain the best possible outcome for your case.