Bankruptcy laws are made for the help of the people who can no longer pay their creditors get a chance to pay that is by liquidating assets or by creating a repayment plan.
Bankruptcy laws also have laws for troubled businesses and provide for orderly distributions to business creditors through reorganization or liquidation.
Most cases are filed under the three main chapters of the Bankruptcy Code – Chapter 7, Chapter 11, and Chapter 13.
A bankruptcy case cannot be filed in a state court because Federal courts have exclusive jurisdiction over bankruptcy cases.
A process of bankruptcy case normally begins with the debtor filing a petition with the bankruptcy court which may be filed by an individual, by a couple (husband and wife together), or else by a corporation or other entity. The debtor is required to file a statement listing his/hers assets, income, liabilities, and the names and addresses of all the creditors to which they owe and how much they are owe. After filing of the petition as per the law it stays or prevents creditors from debt collection actions against the debtor and the debtor’s property and as long as the stay remains in effect, creditors cannot bring or continue lawsuits, make wage garnishments, or even can’t make a telephone call demanding of payment. A notice is given from the clerk of court to the creditor that the debtor has filed a bankruptcy petition. Some bankruptcy cases are filed to allow liquidation of the debtor’s property (Chapter 7), while in some cases a debtor has to reorganize and establish a plan to repay creditors (Chapter 11).
In most of the bankruptcy cases liquidation of the property of individual consumers is involved and there is little or no money available from the debtor’s estate to pay creditors and as a result in these cases there are few issues or disputes, and at the end the debtor is normally granted a “discharge” of most debts without objection which means that the debtor will no longer be personally liable for repaying the debts.
In other cases, however, disputes may give rise to litigation in a bankruptcy case over such matters as:-
– Who owns the certain property, how it should be used and what is the worth of the property.
– How much is owed on a debt, whether the debtor should be discharged from certain debts or not, or how much money should be paid to lawyers, accountants, auctioneers, or other professionals.
Litigation in the bankruptcy court is conducted in much the same way that civil cases are handled in the district court and there may be involvement of discovery, pretrial proceedings, settlement efforts, and a trial.
Under the Bankruptcy Code there are six basic types of bankruptcy cases, each the cases are traditionally given the names of the chapters that describe them.
Entitled as Liquidation, contemplates an orderly, court-supervised procedure by which a trustee takes over the assets of the debtor’s estate, reduces them to cash, and makes distributions to creditors, subject to the debtor’s right to retain certain exempt property and the rights of secured creditors. Because there is usually little or no nonexempt property in most chapter 7 cases, there may not be an actual liquidation of the debtor’s assets. These cases are called “no-asset cases.” A creditor holding an unsecured claim will get a distribution from the bankruptcy estate only if the case is an asset case and the creditor files a proof of claim with the bankruptcy court. In most chapter 7 cases, if the debtor is an individual, he or she receives a discharge that releases him or her from personal liability for certain dischargeable debts. The debtor normally receives a discharge just a few months after the petition is filed. Amendments to the Bankruptcy Code enacted in to the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 require the application of a “means test” to determine whether individual consumer debtors qualify for relief under chapter 7. If such a debtor’s income is in excess of certain thresholds, the debtor may not be eligible for chapter 7 relief.
Entitled as Adjustment of Debts of a Municipality, provides essentially for reorganization, much like a reorganization under chapter 11. Only a “municipality” may file under chapter 9, which includes cities and towns, as well as villages, counties, taxing districts, municipal utilities, and school districts.
Entitled as Reorganization, ordinarily is used by commercial enterprises that desire to continue operating a business and repay creditors concurrently through a court-approved plan of reorganization. The chapter 11 debtor usually has the exclusive right to file a plan of reorganization for the first 120 days after it files the case and must provide creditors with a disclosure statement containing information adequate to enable creditors to evaluate the plan. The court ultimately approves (confirms) or disapproves the plan of reorganization. Under the confirmed plan, the debtor can reduce its debts by repaying a portion of its obligations and discharging others. The debtor can also terminate burdensome contracts and leases, recover assets, and rescale its operations in order to return to profitability. Under chapter 11, the debtor normally goes through a period of consolidation and emerges with a reduced debt load and a reorganized business.
Entitled as Adjustment of Debts of a Family Farmer or Fisherman with Regular Annual Income, provides debt relief to family farmers and fishermen with regular income. The process under chapter 12 is very similar to that of chapter 13, under which the debtor proposes a plan to repay debts over a period of time – no more than three years unless the court approves a longer period, not exceeding five years. There is also a trustee in every chapter 12 case whose duties are very similar to those of a chapter 13 trustee. The chapter 12 trustee’s disbursement of payments to creditors under a confirmed plan parallels the procedure under chapter 13. Chapter 12 allows a family farmer or fisherman to continue to operate the business while the plan is being carried out.
Entitled as Adjustment of Debts of an Individual With Regular Income, is designed for an individual debtor who has a regular source of income. Chapter 13 is often preferable to chapter 7 because it enables the debtor to keep a valuable asset, such as a house, and because it allows the debtor to propose a “plan” to repay creditors over time – usually three to five years. Chapter 13 is also used by consumer debtors who do not qualify for chapter 7 relief under the means test. At a confirmation hearing, the court either approves or disapproves the debtor’s repayment plan, depending on whether it meets the Bankruptcy Code’s requirements for confirmation. Chapter 13 is very different from chapter 7 since the chapter 13 debtor usually remains in possession of the property of the estate and makes payments to creditors, through the trustee, based on the debtor’s anticipated income over the life of the plan. Unlike chapter 7, the debtor does not receive an immediate discharge of debts. The debtor must complete the payments required under the plan before the discharge is received. The debtor is protected from lawsuits, garnishments, and other creditor actions while the plan is in effect. The discharge is also somewhat broader (i.e., more debts are eliminated) under chapter 13 than the discharge under chapter 7.
Entitled as Ancillary and Other Cross-Border Cases, is to provide an effective mechanism for dealing with cases of cross-border insolvency. This publication discusses the applicability of Chapter 15 where a debtor or its property is subject to the laws of the United States and one or more foreign countries.
In addition to the basic types of bankruptcy cases, Bankruptcy Basics provides an overview of the Service members’ Civil Relief Act, which, among other things, provides protection to members of the military against the entry of default judgments and gives the court the ability to stay proceedings against military debtors.
This publication also contains a description of liquidation proceedings under the Securities Investor Protection Act (“SIPA”). Although the Bankruptcy Code provides for a stockbroker liquidation proceeding, it is far more likely that a failing brokerage firm will find itself involved in a SIPA proceeding. The purpose of SIPA is to return to investor’s securities and cash left with failed brokerages. Since being established by Congress in 1970, the Securities Investor Protection Corporation has protected investors who deposit stocks and bonds with brokerage firms by ensuring that every customer’s property is protected, up to $500,000 per customer.
The bankruptcy process is complex and relies on legal concepts like the “automatic stay,” “discharge,” “exemptions,” and “assume.” Therefore, the final chapter of this publication is a glossary of Bankruptcy Terminology which explains, in layman’s terms, most of the legal concepts that apply in cases filed under the Bankruptcy Code.