Bankruptcy Law Overview
The term "Bankruptcy" refers to the legal status of an individual or company that is unable to pay off its outstanding debts. By filing for bankruptcy, the individual or company can discard their debts or make a plan to repay those debts. When the term "bankruptcy" is referred to in layman terms, it has something to do with the person being broke. The bankruptcy case usually begins with the debtor filing a petition with the bankruptcy court. This petition may be filed by an individual, by spouses, or by a corporation or entity. The bankruptcy status can only be granted by a state or federal court. Individuals filing for bankruptcy file for personal bankruptcy, which is usually the last resort for people who are inundated with loans or bills. Read on to understand the bankruptcy process, and get an overview of bankruptcy, the different bankruptcy types, and how it can help.
History of Bankruptcy
Some of the earliest attempts at creating universal rules for bankruptcy began in the 1800's. The initial rules were made and were amended when the so-called "Nelson Act" was finally passed in 1898. Nelson Act gave companies the option to discharge their debts. However, it did not extend that option to individuals or consumers.
In 1978, Congress enacted the "Bankruptcy Code" which offered a much broader version of the bankruptcy laws. Since then, the Bankruptcy Code has been amended numerous times and it governs all U.S. bankruptcy cases now.
How do Bankruptcy Courts Work?
Although most bankruptcy cases are heard in the civil or criminal court, there is a dedicated system of bankruptcy courts throughout the United States. Each bankruptcy court has its own local rules.
Bankruptcy judges in the United States have the authority to make binding decisions in bankruptcy cases. They can review the case to decide whether or not to discharge the debt or to grant it. Even though the judges have the authority to take decisions, most aspects of the bankruptcy process are dealt with outside of court. The process is done by an appointed trustee who carries out the administrative duties of the different types of bankruptcy cases like Chapter 7 or Chapter 13.
Debtors filing for bankruptcy are not required to appear in court. They have very little interaction with the judge. They only appear before the judge in case of any objections in the bankruptcy plan. In most cases, an informal meeting of the creditors is typically held at the trustee's office, also called a "341 meeting."
What is the Goal of Bankruptcy?
Federal bankruptcy laws have been in place to allow businesses and consumers to obtain a fresh start. It allows debtors to particularly get out of heavy debts and start over when everything else has failed. This is achieved through a bankruptcy discharge which is a court order releasing the debtor from personal liability for certain debts. The bankruptcy discharge prevents creditors from communicating with the debtor.
What are the Different Types of Bankruptcy?
Depending on whether you are an individual or a business, you will file with a different type of bankruptcy as defined under the U.S. Bankruptcy Code. Other factors such as the status of your debts and the creditors can all impact the type of bankruptcy you will be filing for.
Chapter 7 Bankruptcy - Chapter 7 bankruptcy, also called "Liquidation," requires that most of the assets of the debtor are sold for cash or "liquidated" to pay off creditors. However, only particular assets may be liquidated using this method, and not all creditors are expected to receive proceeds.
Major changes to the Bankruptcy Code in 2005 included the requirement of a "means test" to determine eligibility for personal bankruptcy under Chapter 7. The test determines whether or not the debtor has too much income for this type of filing.
Chapter 13 Bankruptcy - Chapter 13 bankruptcy, also called "Adjustment of Debts of an Individual with Regular Income," is best suited to debtors with regular income. Those filing for Chapter 13 bankruptcy are able to hold on to valuable assets such as their house or car. Debtors filing for Chapter 13 work out a plan to repay their creditors instead of liquidating their assets. The time period to repay debts is usually longer, and spans over a period of three to five years.
In Chapter 13 Bankruptcy, a confirmation hearing will be held by the court that will either approve or reject the repayment plan based on the requirements established by the Code. Chapter 13 allows the filer to remain in possession of their property and make payments to creditors through the trustee.
Chapter 11 Bankruptcy - Chapter 11 bankruptcy, also called "Reorganization," is used by businesses as they repay their creditors while continuing operations. Chapter 11 gives debtors the right to file a reorganization plan for the first 120 days after filing the case. The plan has to include a disclosure statement to creditors with enough information that helps them evaluate the plan.
Chapter 11 gives the option to debtors to pay certain debts and discharge other entirely. Debtors also have the option to offload leases and contracts while they recover certain assets and focus their efforts on becoming profitable. They may reduce their work force during the consolidation period.
Chapter 12 Bankruptcy - Chapter 12 bankruptcy, also called "Adjustment of Debts of a Family Farmer or Fisherman with Regular Annual Income," is similar to Chapter 13, as it allows the debtor to devise a plan to repay their debts over a period of several years. This time period can be from three to five years with court approval. The goal of Chapter 12 is to allow family farmers and fishermen to continue operations without any setbacks.
Chapter 9 Bankruptcy - Chapter 9 bankruptcy, also called "Adjustment of Debts of a Municipality," allows town, cities, school districts, and other municipalities to declare bankruptcy. Chapter 9 bankruptcy works similar to Chapter 11 reorganization, but is applicable to cities or municipalities instead of businesses.