The Basics of Bankruptcy

The month of September blogs discussed different aspects of divorce. As mentioned last week, divorce and bankruptcy can go hand in hand. Since a large part of this firm’s caseload is bankruptcies. Filing can be a stressful and confusing process. To help ease the process, this week will focus on the basics of bankruptcy.

Bankruptcy Laws help individuals or businesses liquidate assets to pay creditors or create a payment plan to pay back creditors and get a fresh start. Federal Courts have jurisdiction over bankruptcy cases. The three main chapters of bankruptcy are Chapter 7 (Liquidation), Chapter 11 (Reorganization) and Chapter 13 (Debt Adjustment). Regardless of the Chapter, all debtors must go through an approved credit counseling course prior to filing. Briefly, each of the main Chapters are listed below. Future blogs will discuss each Chapter in greater detail.

Chapter 7: Liquidation

This Chapter liquidates the debtor’s assets to pay off creditors. Liquidate means the sale of nonexempt property. In order to qualify of a Chapter 7 under the Bankruptcy Code, the debtor must pass the means test, meaning the debtor must have little disposable income at the end of the month.

Chapter 11: Reorganization

Chapter 11 is typically used to reorganize a business. Under this Chapter, the debtor will become “debtor in possession” until the confirmation of the plan of reorganization, the case is converted to a Chapter 7 or it is dismissed. A debtor in possession means the debtor keeps possession of its assets during reorganization.

Chapter 13: Debt Adjustment

If a debtor is able to pay off part or all of the debt under the bankruptcy laws, a Chapter 13 can be filed. This allows the debtor to propose a repayment plan over three or five years during which no creditor can start or continue collection efforts.

Usually when a bankruptcy is first filed, an Automatic Stay will occur which provides a temporary stop of all judgments, repossessions, foreclosures and collection activity. A Meeting of Creditors is held under all Chapters where the debtor must appear before the trustee and any creditors and answer questions under oath. During the course of a bankruptcy, funds are distributed based on the type of claim the creditor has. There are three types of claims in a bankruptcy. First, a priority claim, this is a special status granted by the bankruptcy law that includes most taxes and costs of bankruptcy proceedings. Second, secured claims, this is a debt in which the creditor has the right to take back property if the debtor does not pay the debt. Third, unsecured claim, this is where the creditor has no authority to collection against property owned by the debtor. The final stage of a bankruptcy is the discharge. The discharge must be approved and prevents any creditors under the bankruptcy from initiating or continuing any legal action against the debtor.

Other types of bankruptcy are Chapter 9 (Municipality Bankruptcy), Chapter 12 (Family Farmer or Family Fisher), and Chapter 15 (Ancillary and Other Cross-Border Cases). The United States Courts website is a great tool for learning more on bankruptcy and other topics.

*This blog is meant for informational purposes only. This blog is not intended as legal advice. If you have any questions or wish to speak to an attorney, please contact our office*