The foundation for American bankruptcy law is found in the U.S. Constitution. Our Founding Fathers stipulated everyone deserves a financial fresh start. Congress used this Constitutional power to implement the current bankruptcy code (i.e. laws) and each state has followed suit, enacting its own bankruptcy laws.
Bankruptcy’s Legal Foundation
Federal bankruptcy law, those laws passed by Congress, mandate bankruptcy procedures, combined with local rules of court. Whereas, state laws, those passed by the individual states, outline property rights in the form of property exemptions. Exemptions list the property that cannot be taken during bankruptcy proceedings.
Both Individuals and Businesses are Eligible for Bankruptcy Protection
Both individuals and businesses can file for bankruptcy protection, if they meet certain qualifications.
Bankruptcy for Individuals (and Married Couples)
Individuals, typically, file either a Chapter 7 or Chapter 13 bankruptcy petition. Significant to most filers, immediately upon the acceptance of the bankruptcy petition, the court issues a “stay” and all creditor attempts at collection must cease. In other words, the phone calls, foreclosures, and most wage garnishments stop, immediately.
Chapter 7 is a liquidation bankruptcy. If qualified to file by meeting a “means” test, your debts will be discharged. This means that they go away and you never have to pay them again.
Chapter 7 is referred to a “liquidation” bankruptcy because if you have assets in excess of your state’s (or, federal, if permissible) exemptions, those assets are taken and sold by the bankruptcy trustee to pay off your creditors.
It sounds scarier than it is because most people who file Chapter 7 are covered by the exemptions, meaning that they can keep most, if not all, of their property, including their house and car, if future payments can be made.
If your equity exceeds the applicable exemptions, you have the opportunity to purchase your property at the wholesale cost, not what you owe.
Some debts cannot be discharged such as most taxes, child support, alimony, student loans, and criminal debts.
Chapter 13 is a reorganization bankruptcy also known as “wage earners” bankruptcy. If qualified, you are able to pay your debts over a three- to five-year payment plan. Some unsecured debts may be discharged or reduced and interest and penalties are eliminated.
For example, in today’s economic climate, often second and third mortgages can be discharged if they are unsecured, because the value of the home has decreased.
Assets are not seized so long as future payments can be made, in addition to the debt repayment plan payments. In other words, the Chapter 13 petitioner must be a wage earner, or otherwise have sufficient income to make all payments.
Bankruptcy for Businesses
Chapter 11 bankruptcy is typically used for businesses so that they can reorganize and keep functioning. Like Chapter 13 bankruptcy, the petitioner must submit a repayment plan for court approval.
Chapter 11 affords the petitioner the opportunity to eliminate some debts and reduce others. Contracts can be renegotiated and assets can be recovered, allowing the business to rescale and reorganize.
Chapter 12 bankruptcy is a special filing for farmers and fisherman and is quite similar to Chapter 13 filings.
Where to Get More Information about Filing Bankruptcy
Consult with a qualified bankruptcy attorney to learn whether bankruptcy is appropriate for you; and, if so, which bankruptcy filing is in your best interests.
- Bankruptcy Basics