What it Intended to Accomplish? What are the Different Chapters?
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It is very important that you obtain legal advice from an experienced bankruptcy attorney regarding your particular situation. Consultation before you take action will certainly cost you less than what it will cost to fix your unintentional errors.
What is Bankruptcy Intended to Accomplish
The bankruptcy laws were formulated to give the “honest” debtor a “fresh” start. Bankruptcy is not intended to give debtors an unfair advantage over their creditors. This requirement comes from the United States Bankruptcy Code, Title 11 of the United States Code, and it is not intended to protect the debtor who has acted in bad faith in an attempt to defraud creditors.
Once considered a shameful last resort, bankruptcy in the United States is emerging as an acceptable method of resolving serious financial troubles. A record one million individuals filed for bankruptcy protection in the United States in the peak year of 1992, and between 1984 and 1994 the number of personal bankruptcy filings doubled. In just one year (June 2005 to June 2006) there were 1,484,570 total bankruptcy filings. Corporate bankruptcies are commonplace, particularly when corporations are the target of lawsuits, and even local governments seek debt relief through bankruptcy laws.
The goal of modern bankruptcy is to allow the debtor to have a “fresh start,” and the creditor to be repaid the value of their secured debts. If the creditor does not have a secured debt then they may receive a portion of their unsecured debt. Through bankruptcy, debtors liquidate their assets or restructure their finances to fund their debts. Bankruptcy law provides that individual debtors may keep certain exempt assets, such as a home, a car, and common household goods, thus maintaining a basic standard of living while working to repay creditors. Debtors are then better able to emerge as productive members of society, albeit with significantly flawed credit records.
What are the Different Types of Bankruptcy?
Bankruptcy Laws are set forth in the United States Bankruptcy Code, with references to other laws, plus federal and state rules. The Code is divided into chapters: 1, 3, 5, 7, 9, 11, 12 and 15.
There are Two Basic Types of Bankruptcy: Liquidation & Reorganization
Liquidation – chapter 7:
Individuals who reside, have a place of business, or own property in the United States may file for bankruptcy in a federal court under Chapter 7 (“straight bankruptcy”, or liquidation).
In a Chapter 7 bankruptcy, the individual is allowed to keep certain exempt property. Liens secured against property, such as a house or car, survive the liquidation. If the debtor wants to keep the secured property they must pay at least the value. The non-exempt assets, if any, are sold (liquidated) by the trustee and those funds used to repay creditors. Most unsecured debts (such as credit cards) are discharged by the bankruptcy proceeding, but other debts are considered to so important that Congress decided those debts were non-dischargeable. Common exceptions to discharge include child support, alimony, income taxes less than 3 years old and property taxes, most student loans and fines and restitution imposed by a court for any crimes committed by the debtor.
The law requires that all debts must be listed on bankruptcy schedules, even if not dischargeable. The law also requires that the debtor list all assets in their schedules. Failure to do so can result in a criminal referral to the Department of Justice for prosecution.
Fully secured creditors will retain their lien against the collateral. The secured creditor may seek a court order allowing them to repossess the secured collateral (house or car). Fully secured creditors are not entitled to participate in any distribution of liquidated assets that the bankruptcy trustee might make.
When a troubled business is badly in debt and unable to service that debt or pay its creditors, it may file (or be forced by its creditors to file) for bankruptcy in a federal court under Chapter 7. Normally, this would mean that the business ceases operations unless continued by the Chapter 7 Trustee. A Chapter 7 Trustee is appointed, with broad powers to examine the business’s financial affairs. The Trustee generally sells all the assets and distributes the proceeds to the creditors. It is possible that all or a portion of the company is sold intact to other companies during the liquidation.
In a Chapter 7 case, a corporation or partnership does not receive a bankruptcy discharge—instead, the entity is dissolved. Once all assets of the corporate or partnership debtor have been fully administered, the case is closed. The debts of the corporation or partnership theoretically continue to exist until the expiration of the applicable statutory period.
Reorganization – Chapter 9 (municipality), Chapter 11 (business), Chapter 12 (farmers and fishermen), Chapter 13 (individual) and Chapter 15 (cross border bankruptcy). Frequently Asked Questions for chapter 13
Unlike liquidation, reorganization provides the debtor with an opportunity to retain nonexempt assets. In return, the debtor must agree to pay debts in strict accordance with a Reorganization Plan approved by the bankruptcy court. During this repayment period, creditors are unable to pursue debts beyond the provisions of the reorganization plan. This gives the debtor the chance to restructure affairs in the effort to meet financial obligations.
Reorganizations can be used to strip wholly unsecured mortgages on land or to pay the fair market value of property. This allows the debtor to keep property and pay the fair market value rather than the entire amount of the secured debt. There are some exceptions. The debtor can surrender property to the lender or landlord.
To be eligible for a reorganization bankruptcy, the debtor must have sufficient income to make a reorganization plan feasible. If the debtor fails to comply with the reorganization plan, the bankruptcy court may order liquidation. A debtor who successfully completes the reorganization plan is entitled to a discharge of remaining debts. In keeping with the general preference for bankruptcy rehabilitation rather than liquidation, the goal of this policy is to reward the conscientious debtor who works to help creditors by resolving his or her debts.