Legal•Info

Bankruptcy Basics

Bankruptcy is a process that seeks to benefit both the debtors and the creditors by providing a way for the debtors to receive relief from their turmoil, while creditors receive their restitution from the property that the debtor does not need to survive.

A debtor has the choice to file for bankruptcy to resolve a constantly worsening financial situation in the hopes of ceasing the collection of debts for a set amount of time in order to reach financial restoration. In some cases, a creditor may choose to force the filing of a bankruptcy proceeding.

There are bankruptcy courts assigned to every judicial district in the U.S. Each state has at least one of more districts. The U.S. Bankruptcy judge is the official with decision making power over bankruptcy proceedings. The bankruptcy judge decides every matter connected to a bankruptcy case, such as, filing eligibility, and discharge of debts. However, much of the bankruptcy proceedings are administrative and is handled away from the courthouse. A debtor has very limited contact with the bankruptcy judge, a trustee carries out the majority of the interaction. The only time a debtor will appear in front of a bankruptcy judge is if there were objections raised in the case.

The most well-known forms of bankruptcy are Chapter 7 and 13 under the Bankruptcy Code. However, other forms of bankruptcy exist, including Chapter 9, Chapter 11, Chapter 12, and Chapter 15.

It is recommended that people filing bankruptcy hire an attorney. Bankruptcy can be a difficult process to undergo alone. A professional attorney, who is well-versed in state and federal bankruptcy laws, can be a real asset to a debtor.

For Chapters 7 and 13 of the bankruptcy code, debtors will be subject to a means test. The means test determines whether a debtor will qualify for either Chapter 7 or Chapter 13. The debtor's income level and living expenses are used when performing means test calculations.

Chapter 7 bankruptcy involves liquidating the debtor's assets in order to repay creditors. In order to do this, a trustee is assigned to the case. The trustee determines which assets, belonging to the debtor, are exempt and not exempt from liquidation. After determining this, all non-exempt items are sold or liquidated. The proceeds from liquidation are then used for debt repayment. The Chapter 7 bankruptcy process usually takes less than six months to complete.

Chapter 13 bankruptcy is also known as individual debt adjustment or the wage earner's plan. Under Chapter 13 of the bankruptcy code, debtors must propose a repayment plan to the bankruptcy court. The plan, after being approved, is completed over the next three to five years. A trustee will assist the debtor in the repayment process. The debtor is not always required to repay all of his or her debt, however it is intended to at least repay a portion of the debt.

Chapter 9 bankruptcy, also known as municipality bankruptcy, provides for cities, towns, counties, and other areas.

Chapter 11 bankruptcy, often called reorganization bankruptcy, is typically used for corporations and partnerships. Its main purpose is to ensure the corporation or partnership continues to function and operate while repayments are made to creditors.

Chapter 12 bankruptcy, intended for family farmers and family fishermen, allows the debtor to propose a repayment plan for their debts. The repayment plan may or may not cover the entire debt that is owed by the debtor. Typically, Chapter 12 bankruptcy is a less expensive way for family farmers and fishermen to file bankruptcy.

Chapter 15 bankruptcy is used for cross-border cases. Chapter 15 was recently added to the bankruptcy code in 2005 when Congress signed the Bankruptcy Abuse Prevention and Consumer Protection Act into law.