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|Understanding Bankruptcy in the United States
An article from Wikipedia:
Bankruptcy in the United States is a matter placed under Federal jurisdiction by the United States Constitution (in Article 1, Section 8,
Clause 4), which allows Congress to enact "uniform laws on the subject of bankruptcies throughout the United States." The Congress has
enacted statute law governing bankruptcy, primarily in the form of the Bankruptcy Code, located at Title 11 of the United States Code.
Federal law is amplified by state law in some places where Federal law fails to speak or expressly defers to state law.
While bankruptcy cases are always filed in United States Bankruptcy Court (an adjunct to the U.S. District Courts), bankruptcy cases,
particularly with respect to the validity of claims and exemptions, are often dependent upon State law. State law therefore plays a major role
in many bankruptcy cases, and it is often not possible to generalize bankruptcy law across state lines.
Generally, a debtor declares bankruptcy to obtain relief from debt, and this is accomplished either through a discharge of the debt or
through a restructuring of the debt. Generally, when a debtor files a voluntary petition, his or her bankruptcy case commences.
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
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
The most common types of personal bankruptcy for individuals are Chapter 7 and Chapter 13. As much as 65% of all U.S. consumer
bankruptcy filings are Chapter 7 cases. Corporations and other business forms file under Chapters 7 or 11.
In Chapter 7, a debtor surrenders his or her non-exempt property to a bankruptcy trustee who then liquidates the property and distributes
the proceeds to the debtor's unsecured creditors. In exchange, the debtor is entitled to a discharge of some debt; however, the debtor will not
be granted a discharge if he or she is guilty of certain types of inappropriate behavior (e.g. concealing records relating to financial condition)
and certain debts (e.g. spousal and child support, student loans, some taxes) will not be discharged even though the debtor is generally
discharged from his or her debt. Many individuals in financial distress own only exempt property (e.g. clothes, household goods, an older car)
and will not have to surrender any property to the trustee. The amount of property that a debtor may exempt varies from state to state.
Chapter 7 relief is available only once in any eight year period. Generally, the rights of secured creditors to their collateral continues even
though their debt is discharged. For example, absent some arrangement by a debtor to surrender a car or "reaffirm" a debt, the creditor with
a security interest in the debtor's car may repossess the car even if the debt to the creditor is discharged.
The 2005 amendments to the Bankruptcy Code introduced the "means test" for eligibility for chapter 7. An individual who fails the means
test will have his or her chapter 7 case dismissed or may have to convert his or her case to a case under chapter 13.
Generally, a trustee will sell most of the debtor’s assets to pay off creditors. However, certain assets of the debtor are protected to some
extent. For example, Social Security payments, unemployment compensation, and limited values of your equity in a home, car, or truck,
household goods and appliances, trade tools, and books are protected. However, these exemptions vary from state to state. Therefore, it is
advisable to consult an experienced bankruptcy attorney.
In Chapter 13, the debtor retains ownership and possession of all of his or her assets, but must devote some portion of his or her future
income to repaying creditors, generally over a period of three to five years. The amount of payment and the period of the repayment plan
depend upon a variety of factors, including the value of the debtor's property and the amount of a debtor's income and expenses. Secured
creditors may be entitled to greater payment than unsecured creditors.
Relief under Chapter 13 is available only to individuals with regular income whose debts do not exceed prescribed limits. If you're an
individual or a sole proprietor, you are allowed to file for a Chapter 13 bankruptcy to repay all or part of your debts. Under this chapter, you
can propose a repayment plan in which to pay your creditors over three to five years. If your monthly income is less than the state's median
income, your plan will be for three years unless the court finds "just cause" to extend the plan for a longer period. If your monthly income
is greater than your state's median income, the plan must generally be for five years. A plan cannot exceed the five-year limitation.
In contrast to Chapter 7, the debtor in Chapter 13 may keep all of his or her property, whether or not exempt. If the plan appears feasible
and if the debtor complies with all the other requirements, the bankruptcy court will typically confirm the plan and the debtor and creditors
will be bound by its terms. Creditors have no say in the formulation of the plan other than to object to the plan, if appropriate, on the
grounds that it does not comply with one of the Code's statutory requirements. Generally, the payments are made to a trustee who in turn
disburses the funds in accordance with the terms of the confirmed plan.
When the debtor completes payments pursuant to the terms of the plan, the court will formally grant the debtor a discharge of the debts
provided for in the plan. However, if the debtor fails to make the agreed upon payments or fails to seek or gain court approval of a modified
plan, a bankruptcy court will often dismiss the case on the motion of the trustee. Pursuant to the dismissal, creditors will typically resume
pursuit of state law remedies to the extent a debt remains unpaid.
In Chapter 11, the debtor retains ownership and control of its assets and is re-termed a debtor in possession ("DIP"). The debtor in
possession runs the day to day operations of the business while creditors and the debtor work with the Bankruptcy Court in order to
negotiate and complete a plan. Upon meeting certain requirements (e.g. fairness among creditors, priority of certain creditors) creditors are
permitted to vote on the proposed plan. If a plan is confirmed the debtor will continue to operate and pay its debts under the terms of the
confirmed plan. If a specified majority of creditors do not vote to confirm a plan, additional requirements may be imposed by the court in
order to confirm the plan.
Chapter 7 and Chapter 13 are the efficient bankruptcy chapters often used by most individuals. The chapters which almost always apply to
consumer debtors are chapter 7, known as a "straight bankruptcy", and chapter 13, which involves an affordable plan of repayment. An
important feature applicable to all types of bankruptcy filings is the automatic stay. The automatic stay means that the mere request for
bankruptcy protection automatically stops and brings to a grinding halt most lawsuits, repossessions, foreclosures, evictions, garnishments,
attachments, utility shut-offs, and debt collection harassment.
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