Bankruptcy Laws

Attorneys spend years learning all of the aspects of bankruptcy law, and if you as an individual, a married couple, or a business owner are considering filing for bankruptcy, it’s imperative that you consult an experienced bankruptcy lawyer.

There are six types of bankruptcy under the Bankruptcy Code, located at Title 11 of the United States Code:

  • Chapter 7: basic liquidation for individuals and businesses; also known as straight bankruptcy; it is the simplest and quickest form of bankruptcy available
  • Chapter 9: municipal bankruptcy; a federal mechanism for the resolution of municipal debts
  • Chapter 11: rehabilitation or reorganization, used primarily by business debtors, but sometimes by individuals with substantial debts and assets; known as corporate bankruptcy, it is a form of corporate financial reorganization which typically allows companies to continue to function while they follow debt repayment plans
  • Chapter 12: rehabilitation for family farmers and fishermen;
  • Chapter 13: rehabilitation with a payment plan for individuals with a regular source of income; enables individuals with regular income to develop a plan to repay all or part of their debts; also known as Wage Earner Bankruptcy
  • Chapter 15: ancillary and other international cases; provides a mechanism for dealing with bankruptcy debtors and helps foreign debtors to clear debts.

The Fundamentals

The bankruptcy laws in the U.S. are laid out in Title 11 of the United States Code. There are also laws concerning bankruptcy in other parts of the Code, such as those involving taxes and the Internal Revenue Service. State laws regarding property also apply in many bankruptcy cases.

Bankruptcy is not for every individual or for every case. Whether or not an individual or business qualifies for bankruptcy depends on the amount of personal income and the amount of debt. In 2005 the federal government altered how bankruptcy in the United States is managed. President Bush approved the Bankruptcy Abuse Prevention and Consumer Protection Act in that year. Because of the heavy abuse to the bankruptcy system, this new act changed how the Bankruptcy Code functions.

In prior years those who did not have severe enough cases to apply for bankruptcy were being approved through the system. This left those in need of the bankruptcy system with less attention. The Bankruptcy Abuse Act now sets limits and new requirements for those who are able to qualify for Chapter Seven bankruptcy as well as set shorter deadlines for Chapter Thirteen cases.

The complexity of bankruptcy laws can’t be ignored, but it’s helpful to have at least a grasp of the fundamentals. Such an understanding will help you prepare yourself to make some decisions about whether and how you will file for bankruptcy.

Federal Chapters

The United States federal government has created several different chapters of bankruptcy to fulfill the needs of the American people. Chapter Seven bankruptcy allows individuals to relieve their debts in severe cases. Chapter Nine bankruptcy is designed for municipality purposes. Chapter Eleven bankruptcy reorganizes accounts under the Bankruptcy Code. Chapter Twelve bankruptcy allows family-owned farms to relinquish debts as well as fisherman families. Chapter Thirteen is another form of individual bankruptcy for less severe necessities. And Chapter Fifteen bankruptcy is used for Cross-border and ancillary cases.

Personal Bankruptcy

Chapter Seven bankruptcy is the most coveted form of bankruptcy in the nation. This chapter eliminates an individual’s debts within a few months and does not require the individual to pay the debts out of his or her own pocket. Chapter Seven bankruptcy cases have assigned trustees who will evaluate an individual’s property and will decide which property will be liquidated.

Each state has different holds on which kind of property can and cannot be liquidated. The property will be sold for what it is currently worth, not for what it was originally purchased. The liquidated property will then be used to pay off the outstanding debts, after the trustee takes his or her compensation percentage.

Chapter Thirteen bankruptcy is the other form of personal bankruptcy. Rather than liquidate property, individuals who qualify will have their income and debts evaluated. The court will then draw up and assign a personal repayment plan. This plan will allot how much the individual will need to pay each month, from his or her own personal income, to pay off his or her debts in a maximum of five years.

Chapter 7: Liquidation

For individuals and married couples who are considering bankruptcy, a Chapter 7 bankruptcy may be the appropriate option. In Chapter 7, a trustee is appointed to collect all the “non-exempt” property of the debtor(s), sell it, and distribute the proceeds of the sale to the creditors (the people and companies to whom the debtors owe money). This is referred to as liquidation. The debtor’s essential property, such as a home and a car for getting to work, are exempt from the liquidation.

Chapter 13: Reorganization

Chapter 13 is a different type of bankruptcy for individuals and couples. It allows the debtor(s) to keep all or at least most of their property and to pay creditors from future earnings. The debtor files a repayment plan with the court, agreeing to the terms of the repayment of debts over a specified period, generally three to five years.

Changes in the Bankruptcy Laws

Some new bankruptcy laws have been put into effect in recent years, in part as a way to reduce the misuse and abuse of bankruptcy. For example:

  • There is now an income limit for filing Chapter 7 bankruptcy. If your income is over the limit, you cannot file a Chapter 7.
  • All debtors must now get credit counseling before they will be allowed to file a bankruptcy.
  • Other changes impose new, more stringent requirements on the attorneys who handle bankruptcies.

Discharge

Bankruptcy discharge relinquishes a debtor from liability for certain kinds of personal debts. After a discharge an individual is not legally required to pay these debts. As a permanent order, creditors may no longer submit collection actions, including phone calls and postal service. A discharge is assigned to those who have had a bankruptcy chapter approved.

When a discharge comes through depends on the specific kind of chapter. Some chapters may call for discharges within a few months, while others require repayment and a minimum of three or four years. Instructional courses must first be completed, in some chapters, and a trustee must first approve the discharge.

Benefits to Filing for Bankruptcy

There are several major benefits to filing for bankruptcy, including:

  • Discharge Many Kinds of Debt:
    In Chapter 7 bankruptcy, you can discharge certain kinds of debt, including credit card debt and medical bills, and are no longer liable for those debts. Under Chapter 13, you will design a repayment plan to pay back your debts over a 3-5 year period, at the end of which the remaining debt will be discharged.
  • Stop Creditor Harassment:
    After you have filed for bankruptcy, collection efforts from creditors must stop immediately. This includes phone calls, letters and other collection efforts. If creditors do contact you during a bankruptcy, they may be subject to sanctions.
  • Rebuild Credit:
    While a bankruptcy will remain on your credit report for 10 years in California, a bankruptcy will typically help you improve your credit. Most people who file for bankruptcy already have late payments and defaulted accounts listed on their credit report and these will be no longer listed after your bankruptcy. You may be eligible for loans and lines of credit soon after a bankruptcy is filed.

Bankruptcy Court

Whether you file for bankruptcy as an individual or for your business, you will probably have to appear in a bankruptcy court at least one time during the processing of your bankruptcy. There are bankruptcy courts across the United States, and the judicial district in which you are residing is probably the place where you’ll be filing your bankruptcy petition. Bankruptcy cases are not handled in state courts.

Tell the Complete Truth

An important note about bankruptcy court: Tell the bankruptcy judge the truth about your finances. If you:

  • “forget” some pertinent details about your debts and/or your assets
  • fail to accurately give full disclosure about your property and creditors
  • omit any relevant information about your financial circumstances, or
  • use a fraudulent social security number to hide the fact that you’ve completed a bankruptcy before

— your case will be dismissed by the judge, and you could be prosecuted for fraud, a crime for which the potential punishment is prison time.

Bankruptcy Forms Required by the Court

If you and your bankruptcy attorney have decided that bankruptcy is right for you, and you have decided whether a Chapter 7, Chapter 13, or Chapter 11 is the appropriate alternative, you may now need to attend credit counseling before you can file your bankruptcy petition.

When you file for bankruptcy, you must fill out a petition and other forms that have you describe:

  • Your current income and monthly living expenses
  • Property that you have now
  • Property that you owned and money you spent during the past two years
  • Property that you sold or gave away during the past two years
  • Property that bankruptcy law allows you to keep (“exempt property”) such as some of the equity in your home, household furnishings, your clothing, necessities such as a car, and the tools of your trade, for example
  • Debts

Find Out More about Bankruptcy Court

The best way to get a true idea of what you can expect in bankruptcy court is to contact an experienced bankruptcy attorney in your area. Get your financial information together beforehand, so that you can give the attorney an accurate picture of your situation.

Talk with a Bankruptcy Attorney Today

If you are under severe financial stress, whether as an individual or as a business owner, bankruptcy may be the appropriate step for you to take. It’s essential that you discuss your circumstances with an experienced bankruptcy attorney contact a bankruptcy lawyer in your area today.


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