Bankruptcy

This article is intended to provide some general bankruptcy information and is certainly not intended to replace the tailored information a debtor will receive from an attorney. Bankruptcy is governed by Federal Law (Title 11 of the US Code separated into individual Chapters, each dealing with a different type of bankruptcy) but the bankruptcy laws of each state also play an important part; consequently, though there are bankruptcy kits, you will probably need a lawyer to successfully file and a lawyer search should focus on a bankruptcy attorney or bankruptcy law firm licensed in the debtor’s state of residence. The attorney licensed in your state can tell you how to file for bankruptcy in a federal court within your state.

American bankruptcy is actually a form of relief granted by a court, so it is not so much a matter of a debtor "declaring bankruptcy"; rather, someone files a petition requesting that the court discharge or reduce or restructure debts in bankruptcy. In American bankruptcy, a federal court manages a debtor’s property to protect the debtor from his/her creditors and to benefit the creditors as much as possible under the circumstances. While bankruptcy is designed for long-term relief, one of the most important features of filing for bankruptcy is the "automatic stay." When a petition is filed for bankruptcy, either by the debtor ("voluntary bankruptcy") or by one of his/her creditors ("involuntary bankruptcy"), most collection efforts such as utility shut-offs, foreclosures, evictions, garnishments and lawsuits, are immediately stopped.

There are types of bankruptcy covering all sorts of debtors but the 4 types used by most American debtors are Chapter 7, Chapter 11, Chapter 12 and Chapter 13. Addressing each type of bankruptcy, from most used to least used:

• CHAPTER 7: also called "Straight Bankruptcy" or "Liquidation" and used by both individuals and corporations, this is the fastest, easiest type of bankruptcy. The debtor is allowed to keep certain "exempt" property, which varies from state to state but usually includes Social Security payments, unemployment compensation, household goods and appliances, tools of your trade, books, a limited amount of equity in your home, and a limited amount of equity in a car or truck. The debtor must surrender all non-exempt property to a court-appointed trustee who liquidates that non-exempt property and distributes the proceeds to creditors. When the process is complete, the debts are discharged in bankruptcy. In order to use Chapter 7, a debtor must pass a "means test" to see whether he/she is eligible; if the debtor fails the "mean test," his/her case will be dismissed and/or may have to convert to a Chapter 13 bankruptcy case. While the ideal of Chapter 7 is complete debt relief, there are exceptions: if a debtor is found to have concealed some financial information and/or records, the court will not grant a discharge of debt; also, the court will not discharge certain types of debts such as student loans, alimony, child support and some taxes. In addition, secured creditors have more protection than unsecured creditors; for example, a creditor with a secured interest in the debtor’s car can repossess the car even if the debt is discharged, unless the debtor "reaffirms" the debt or surrenders the car. The debt relief provided by Chapter 7 Bankruptcy has significant consequences and can be granted only once every 8 years, so filing for bankruptcy should not be taken lightly.

• CHAPTER 13: also called "Wage Earner Bankruptcy," this is the second most "popular" type of bankruptcy because it allows an individual debtor (not a corporation) to keep all his/her assets whether or not they are "exempt" and to repay some or all debts with debt restructuring and even debt reduction according to a payment plan lasting 3 to 5 years. Only debtors with regular income and with debts under certain limits can use Chapter 13 bankruptcy. The debtor proposes a payment plan, his/her creditors have no say in the plan except to object for limited reasons and if the court allows the repayment plan, the debtor and all creditors are bound by the plan. The amount and duration of payment depend on many factors including the value of property, the amount of income and the amount of expenses. The payments are usually made to the court-appointed trustee, who pays the creditors according to the plan. After the debtor makes all payments according to the plan, the court will discharge the debts. However, if the debtor does not make the payments or does not obtain court approval of a modified plan, the trustee will move to dismiss the case and the court will usually dismiss it, leaving the creditors free to resume all collection remedies for the unpaid debts. The rule of thumb is that Chapter 13 bankruptcy can be granted every 6 years but the time limit is affected by other factors, so a debtor should definitely consult an attorney about his/her circumstances.

• CHAPTER 11: also called "Reorganization," In Chapter 11 Bankruptcy, the individual or corporate debtor is called a "Debtor in Possession," keeps all the assets and continues to run the day-to-day business while trying to negotiate a payment plan. Unlike Chapter 13, Chapter 11 allows the creditors to vote on the debtor’s proposed plan. If the plan is approved by a majority of the creditors, the debts are paid according to the plan. If the plan is rejected by a majority of the creditors, the court may issue an order imposing additional requirements on the debtor in order to approve the plan.

• CHAPTER 12: this type of bankruptcy is uniquely designed for family farmers and fishermen, allowing them to adjust their debts.