Debt and Bankruptcy BasicsBankruptcy is a legally proven inability of a person or an organization to pay the debt back to their creditors. In most cases it is the debtor who initiates bankruptcy. The debtor’s bankruptcy claim may be responded with a bankruptcy petition filed by the creditors and aiming at recouping a part of the money they had lent this given debtor.
Contents of the article: 1 Purpose
2 Bankruptcy in the United States
3 Bankruptcy chapters
Purpose The primary purposes for which a person may decide to file for bankruptcy are: getting a fresh start in his/her credit history by getting rid of most debts; and repay all his/her creditors in turn (if the debtor has enough means for the repayment). Once the bankruptcy of a debtor is announced, all his/her non-exempt assets (if there are any) get distributed among the creditors.
There are two basic types of bankruptcy: (1) reorganization bankruptcy, and (2) liquidation bankruptcy:
(1) Reorganization bankruptcy. In this type of bankruptcy the debtor reorganizes his/her assets and debts before partially satisfying the existing creditor claims. This type of bankruptcy may include plans for individuals and for organizations. In the (2) liquidation bankruptcy, the assets of a debtor get sold off to satisfy the money claims of the creditors.
The reorganization bankruptcy option may be more suitable for companies since it can help them survive insolvency due to the amount of creditor claims exceeding the amount of available funds and assets. Basically, what a company does is reducing each creditor’s claims to a partial payment that will allow the business to keep on with its routine commercial activity.
The reorganization bankruptcy filed by the individuals may help them to retain available assets and pay off the reduced amounts of creditors’ claims out of their personal income. Some jurisdictions allow a married couple to be treated as an individual in come cases.
The debtor may protect himself or herself from legal action not connected to bankruptcy throughout the process of bankruptcy pending. This may be done by using a legally imposed stay. In this instance creditors are not able to pursue lawsuits or the wage garnishment. They also cannot force the debtor to pay.
Bankruptcy in the United States Bankruptcy in the USA is placed under Federal jurisdiction by the United States Constitution (in Article 1, Section 8). It states that the Congress may issue “uniform laws on the subject of Bankruptcy throughout the United States.” At the same time, however, it is implemented in statutory law. The essential laws are incorporated within the Bankruptcy Code, which can be found in Title 11 of the United States Code. These statutes are supported by state law in the places where Federal law is not of great importance or is considered second to the state law.
Bankruptcy cases are always declared in United States Bankruptcy Court (an addition to the U.S. District Courts). However, bankruptcy cases, in some way with respect to the validity of claims and exemptions, greatly depend on State law, which in its turn is very important in great number of bankruptcy cases. It is quite hard sometimes to generalize bankruptcy law across state lines.
Bankruptcy chapters According to the Bankruptcy Code, located at Title 11 of the United States Code, six types of bankruptcy exist:
Chapter 7 stands for basic liquidation for individuals and businesses;
Chapter 9 deals with municipal bankruptcy;
Chapter 11 is related with rehabilitation or reorganization, used primarily by business debtors (though it can also be used by individuals possessing substantial debts and assets);
Chapter 12 includes information about rehabilitation for family farmers and fishermen;
Chapter 13 deals with rehabilitation with a payment plan for individuals with a regular source of income;
Chapter 15 stands for ancillary and other international cases.
Chapter 7 bankruptcy and Chapter 13 bankruptcy are the most widespread types of personal bankruptcy for individuals. In Chapter 7 debtor’s non-exempt property is relinquished to a bankruptcy trustee and liquidated later. Then the bankruptcy trustee apportions the profit between the debtor’s unsecured creditors. The debt in its turn is declared to be discharged. However, in case the debtor has behaved in an inappropriate way (for instance, concealing documents concerning financial condition), he or she will not be entitled to a discharge of a debt. Moreover, such debts as spousal support and some taxes will not be discharged despite the fact that the debtor is granted a discharge of his or her debt. It’s a common situation when a debtor facing financial distress possesses exempt property only (for instance, items of the household, clothes, an old car). He or she is not obliged to surrender any of such property to a bankruptcy trustee. In this case the state plays a major role, as the amount of property exempted depends on the state a debtor lives in. The relief given in Chapter 7 may be obtained only once in eight years. In most cases, even if the debt is discharged, the secured creditors still have entitlement to their collateral. For instance, the creditor may repossess the debtor’s car with a security interest, even though the debt is discharged, in case there’s no agreement the debtor should surrender a car or have a debt again.
In Chapter 13, the debtor is obliged to cover his debt by paying some part of his future income during the following 3–5 years, in exchange withholding all his property. The amount of money a debtor should pay the creditor and the period of time given depend on a number of aspects (e.g. the income and expenses of a debtor, the value of his/her assets, etc). It’s also possible that secured creditors are empowered to get a greater payment that the unsecured ones.
The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, Pub. L. No. 109-8, 119 Stat. 23 (April 20, 2005) ("BAPCPA"), made essential amendments in the Bankruptcy Code. The consumer lenders strongly supported lots of aspects of BAPCPA. However, many bankruptcy judges, consumer advocates, bankruptcy academics, bankruptcy lawyers and other officials actively resisted. The statutes were actively debated in Congress during eight years. Most of the regulations came into being on October 17, 2005. When signing a bill, President Bush agreed upon the following statements:
First of all, according to the new law, the US citizens able to pay will be obliged to repay at least some part of their debts. However, those debtors whose income is below average will not be entitled to repay their debts. Owing to the new statute, serial filers willing to misuse a number of liberal bankruptcy protections will face great difficulties. Before the debtor willing to efface his/her debt can declare bankruptcy again, he or she will have to wait for eight years since his/her last bankruptcy. Moreover the new statute will help to repress bankruptcy mills earning money by helping abusers to outwit the system.
Apart from other essential amendments to client bankruptcy law, BAPCPA also decreed a so-called “means test”, serving to prevent individuals living through financial hardships and having consumer debt primarily from being allowed to qualify for a Chapter 7 relief. On the other hand, the Means Test helps the debtors to get a discharge much easier. It’s common if a debtor cannot be qualified for Chapter 7 relief of the Bankruptcy Code. The reason for that can be the Means Test or the lack of a stable solution to late payments for secured debts (e.g. car loan, mortgage) in the Chapter 7 bankruptcy. In this case a debtor still may request a relief under Chapter 13 of the Bankruptcy code. According to the Chapter 13 of the Code, a debtor will not be required to repay his or her unsecured debts (e.g. medical bills, various credit card debts).
According to BAPCPA the debtors who seek bankruptcy relief should consult approved credit counseling agencies prior to a bankruptcy petition filing. It also requests individuals to study personal financial management in any of the approved agencies prior to being discharged of debts and getting relief under Chapter 7 or Chapter 13 of the Bankruptcy Code. However, most people are sure that credit counseling doesn’t give any benefit to debtors and the only thing able to give them relief is filing for bankruptcy.
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