Summary of Bankruptcy Law

Bankruptcy law allows a debtor, who is no longer able to pay creditors, to wipe out his debt by liquidating assets to pay off the debt or by creating a repayment plan. The debtor’s circumstances will determine whether they want to eliminate or repay the debt over a certain amount of time. Businesses may be allowed to conduct a bankruptcy proceeding and still remain in business through reorganization and liquidation. After assets have been distributed, bankruptcy law allows some debtors to discharge the debt they have accumulated even if all of the debt has not been paid in full.

The bankruptcy laws are contained in Title 11 of the United States Code. States do not regulate bankruptcy but they are allowed to pass laws that are applicable to the debtor-creditor relationship like identifying property that would be exempt from the proceeding. Bankruptcy proceedings are held in specialized federal courts called bankruptcy courts. All states have at least one bankruptcy court. Some states may have more than one which has jurisdiction over large portions of the state. The bankruptcy courts are part of the District Courts of the U.S. system.

There are a few types of bankruptcy proceedings. For consumers, there are two types of bankruptcy proceedings. The most common is Chapter 7, which is called liquidation. Debtors are allowed to discharge many debts in return for giving up nonexempt property to be sold in an effort to repay creditors. A trustee is appointed to collect the non-exempt property which is sold and the proceeds are distributed to the creditors.

A Chapter 13 bankruptcy allows the rehabilitation of the debtor. Debtors are allowed to keep possession of all property and repay all or some of their debts over a three to five year period. The debtor can use future earnings to pay off creditors rather than selling property. A trustee is appointed in Chapter 7 bankruptcies also to oversee the debtor’s assets. Chapter 11 and 12 bankruptcies are similar to Chapter 13 because they involve rehabilitation.

Businesses are allowed to file Chapter 7 or Chapter 11 bankruptcies. Filing a Chapter 11 bankruptcy, the company is able to reorganize its debt to stay in business. Companies that want to remain in business should not file a Chapter 7 bankruptcy.

Bankruptcy proceedings may be entered into voluntary by the debtor or they may be initiated by creditors. However, once a bankruptcy proceeding has begun, creditors cannot try to collect their debts outside of the proceedings. There may be exceptions. More so, debtors cannot transfer property that has been subject to the proceeding. Also, some transfers that have occurred prior to the proceeding may be put on hold or determine to be invalid. For example, transfers of property, security interest, and liens.

Even though there are many chapters of the Bankruptcy code, Chapter 7, 11, and 13 are the three main ones. Personal bankruptcies are ordinarily filed under Chapter 7 and 13. Business bankruptcies mainly involve Chapter 13 for companies who would like to remain in business.


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