Bankruptcy is the process, protected by the United States Constitution, that allows people or organizations to divest themselves of insurmountable and overwhelming debt.
In the words of the US Code, the process is designed to give, “the honest but unfortunate debtor… a new opportunity in life and a clear field for future effort.” This is accomplished by discharging certain debts, depending on circumstance, and in some cases assisting the debtor in the reorganization of businesses and repayment of non-dischargeable debts.
The particulars of each case vary with the type of bankruptcy being filed and from case to case. This article is designed to give a clear overview of the bankruptcy process, but filing should be done under the advisement of an experienced lawyer.
Understanding the Chapters of Bankruptcy
Depending on the circumstances, different types of bankruptcy are appropriate. They are referred to by their chapter titles in the U.S. Bankruptcy Code. The most commonly filed chapters are 7, 11, 12, and 13.
Chapter 7, commonly referred to as “liquidation”, is available to people whose income does not meet certain thresholds. In this type of bankruptcy, the debtor’s non-exempt assets are liquidated into cash and a trustee distributes that money to creditors. Usually, there are few non-exempt assets.
Chapter 11 is typically used by businesses to relieve some debts and to maintain operations while reorganizing the business structure. It also provides the ability to break leases or contracts that hinder the entity’s ability to recover from debt.
Chapter 12 is very similar to Chapter 13 but is specifically meant for Family Farmers and Fishermen. Just like in Chapter 13, a repayment plan will be designed, approved by a judge, and repaid through a trustee.
Chapter 13 is a method for structuring repayment of some or all debts while allowing the debtor to retain a major asset, such as a house. In these cases, a judge must approve a repayment plan, usually over a time period of three to five years. After this time, the remaining applicable debts are discharged.
Functions of Bankruptcy
Bankruptcy filing is not a cure-all for indebted people, but it can relieve a great deal of the burden of debt. Here is what bankruptcy is designed to do:
Eliminate or Reduce Unsecured Debt
Unsecured debts are things like most types of credit card debt, i.e: debt that is not tied to a specific piece of property. This is the kind of debt most bankruptcy relieves.
Halt Collections Attempts
Calls from collections agencies and creditors are incredibly stressful for people trying to regain financial solvency. From the time of filing, courts prohibit this type of communication from creditors.
Nullify Certain Liens
Some secured debts can be eliminated in certain types of bankruptcy filings. Judgment liens, which are liens ordered by a judge, are an example of the type of lien that can be eliminated.
Keep in mind that not every type of debt is avoidable (able to be eliminated) in bankruptcy. In later articles, as we explore each chapter, we’ll spell out the specific benefits, limitations, and applicability of each.