US bankruptcy law can be a confusing mix of laws, rules, and interpretations. Here are some basics relating to US bankruptcy law. We'll mention the different chapters, voluntary and involuntary bankruptcy, debtor, creditor, types of debts. We hope to answer some of your questions about the bankruptcy laws.
The US Bankruptcy law (sometimes called the Bankruptcy Code) is divided into chapters and sub-chapters. The various types of bankruptcy procedures are usually referred to by the number of the chapter in which they appear in the Code.
Types of Bankruptcies
Chapter 7: Liquidation Chapter 7 of Title 11 concerns bankruptcies where the debtor's property (except exempt property) is turned over to the trustee to pay off the debts. As a simple example, if Mr. Highwood owes $25,000 to his creditors and files for bankruptcy under Chapter 7, Highwood gives his property (money, car, stamp collection, etc.) to the court appointed trustee who will use the assets to pay Highwood's creditors. If there is not enough to pay all the debts, the trustee gives each debtor a part of the assets. The remaining debts are discharged or wiped out and Highwood can start over with a clean slate.
Some of Highwood's property may be exempt and does not have to be given to the trustee. The exemptions may be those listed in the US bankruptcy law or they may be those listed under state law. Each state decides which exemptions a bankrupt debtor can use.
Some examples of exempt property might be a certain amount of cash, a car up to a certain value, some professional books, tools, and equipment; some alimony and support payments, a bible, some clothes, part or all of a home. These vary from state to state. In some states a fairly valuable home can be kept by the debtor while in another state only a very modest home is safe from creditors. You will want to find out about the exemptions that apply to you.
In some Chapter 7 liquidation cases, there are either no assets or very few assets available to pay the creditors. The creditors just write off the debt. If a creditor believes a fraud has occurred when the credit was applied for (perhaps a false credit application), or that the debtor is hiding assets or transferred assets to hide them from the creditors, or at the time the debtor used a credit card (as an example), there was a plan or intent not to pay the money back, then the creditor can ask that the debt not be discharged. If the creditor objects to the discharge, a mini-court case (adversarial proceeding) may be started to have the court decide if the debt should be discharged.
Business Chapter 7 The same rules apply to a business that is a Chapter 7 debtor. If the business is a corporation, the corporation is the debtor and files the petition not the shareholders (unless they also choose to file.) A careful examination will be made of the business books and records to make sure the business was not improperly drained of assets before filing.
Chapter 11: Reorganization Chapter 11 filers are mostly businesses but an individual can also use Chapter 11. This Chapter allows the debtor the business to continue to operate while it gets time to pay its creditors. The bankruptcy court appoints someone to watch the business operation. The business management must make reports to the court as to how things are going. If the business cannot make it, the case can be converted to a Chapter 7 liquidation case and the business is closed down. If it is successful, the business can emerge from Chapter 11 and resume normal operations. Chapter 11 cases are usually quite complicated and a bankruptcy attorney is almost always used.
Chapter 13: Wage Earner Protection This chapter is officially called " Adjustment of Debts of an Individual with Regular Income." The title explains who can use this Chapter. It is to allow an individual who has consumer (household) debts to make a plan to pay creditors. There are limits to the amount of debt and other rules about who can file a Chapter 13 case. The plan usually gives the debtor more time (up to 3 years) to pay creditors. The plan may provide that the creditors must wait longer for their money and that they will not get all the money paid back. The kinds of debts that can be discharged in a Chapter 7 case are somewhat different from those dischargeable in a Chapter 13 case.
The advantage of Chapter 13 when compared to Chapter 7 Liquidation, is that Chapter 13 allows the debtor to keep his/her property. The debtor pays from wages or other regular income and can keep property such as a house, boat, car or other things. Property related to a secured claim may have to be given up to a secured creditor. If the wage earner/debtor fails to make payments according to the plan and does not change the plan, the case can be converted to a Chapter 7 liquidation case.
Involuntary Bankruptcy The Bankruptcy Code permits creditors to file a bankruptcy petition and force a debtor to answer in the Bankruptcy court. There are rules as to the number of creditors and the amount of debt required to begin an involuntary case. This procedure allows creditors to force a debtor into court who has assets but who refuses pay the creditors. An involuntary case can be brought against an individual or a business.
Other Chapters The Bankruptcy law has other chapters relating to railroads and stockbrokers. These are complicated and are not discussed here.
General Comments The laws are quite detailed. The above is a very short summary of some of the content of a few of the chapters. There are many other matters not mentioned such as that a co-debtor may still be liable for a debt even after the debt is discharged in a bankruptcy. Also, some debts are not dischargeable such as some taxes, spouse and child support payments, criminal fines, some school loans, and others.
We suggest seeking advice from an experienced bankruptcy attorney in your area.
Can we help you?
An experienced attorney is probably the best guide through the bankruptcy maze. The possibility for problems to arise is great and the price paid for mistakes may be very high.
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Richard Mann