Bankruptcy Overview

Bankruptcy is the legal way to declare that you are unable to pay your debts. The main purpose of bankruptcy law is to help debtors get a “fresh start.” It also provides creditors with a system that will treat them fairly. Bankruptcy is an option of “last resort” and should not be considered lightly.
Bankruptcy cases are classified by the United States Constitution as a federal matter. They are governed by a federal law called the Bankruptcy Code (Title 11 of the U.S. Code) and are filed in federal court.

In 2005, a new bankruptcy law called the Bankruptcy Abuse Prevention and Consumer Protection Act was enacted by the U.S. Congress. This new law made substantial changes to the bankruptcy process. Specifically, the law makes it more difficult to file certain types of bankruptcy by requiring mandatory credit counseling for anyone considering Chapter 7 or Chapter 13 bankruptcy.

Bankruptcy Basics

A bankruptcy case begins when the debtor pays a filing fee and files a petition for bankruptcy. In the petition and supporting documents, the debtor provides the court with his financial information under penalty of perjury. This means if the debtor lies to the court about her financial situation she may be charged with perjury, a felony, which carries a prison sentence under federal law.
As soon as the bankruptcy petition is filed, an “automatic stay” goes into effect. The “automatic stay” halts the debt collections process against the debtor. In other words, the debtor’s creditors will no longer be able to collect from him. Instead, the bankruptcy court and trustee begins the process of overseeing the payment, restructuring, or discharge of the debtors debts.
The length of your bankruptcy case will vary depending on the type of bankruptcy you file. Typical Chapter 7 cases end in a discharge of debts within 3-4 months. Chapter 13 cases, on the other hand, set up a payment system (called “restructuring debts”) that may last for a 3 to 5 year period.

Who Can File For Bankruptcy?

1. Individuals
2. Sole Proprietorships
3. Partnerships
4. Corporations
5. Family farmers

The filing of a bankruptcy petition is typically a voluntary act taken by the debtor. In some instances, however, creditors may force a debtor into bankruptcy.

Important Documents to Give your Attorney

Every person/entity filing for a bankruptcy should provide his/her attorney with the following documents:

1. Proof of any income made in the previous six months
2. Copies of any assessments and appraisals for real and personal property
3. Copies of driver’s license and Social Security Card
4. A credit report, or other documentation reflecting proof of debt
5. Copies of your tax returns (including W2’s) for the past two years
6. Any papers regarding prior bankruptcies
7. Proof of any prior addresses for the last three years

The documents listed above are necessary for an attorney to give you competent legal advice. Depending on the facts of your case, your attorney may request further documentation.

Types of Bankruptcy Available Under the Law

Bankruptcy law sets up seven different types of bankruptcy. Very specific laws govern each type of bankruptcy. Below is a brief overview of the more common forms of bankruptcy:

• Chapter 7
o Chapter 7, commonly referred to as “liquidation bankruptcy” or “straight bankruptcy,” is the most common and quickest form of bankruptcy.
o Any person or entity (other than a railroad or a banking entity) who passes a “means test” may file for Chapter 7 bankruptcy.
o Under Chapter 7, a trustee is appointed to collect and liquidate certain “nonexempt” assets. All of the debtor’s “nonexempt” property is sold and the money earned is paid to the debtor’s creditors. At the end of this process, the debtor is discharged of eligible debts.
o If filing as an individual under Chapter 7, you will be required to complete “credit counseling” before being discharged of all debts.

• Chapter 11
o Chapter 11 bankruptcy is usually called a “reorganization bankruptcy.” Typically, Chapter 11 cases involve corporations or partnerships trying to reorganize their business; however, individuals may also seek this form of relief.
o In Chapter 11, the debtor reorganizes their affairs through a “plan of reorganization.” A “plan of reorganization” details the terms under which the debtor will pay his creditors back. This “plan of reorganization” is subject to the court’s review. Accordingly, the court may alter the plan after it is proposed by the debtor.
o In a typical Chapter 11 case, the debtor controls his property and is known as a “debtor in possession.” As a “debtor in possession,” you are subject to the bankruptcy court’s supervision.

• Chapter 12
o This type of bankruptcy is helpful for family farmers and family fisherman with “regular annual income.” These family farmers and family fisherman propose a repayment plan and make installment payments to creditors. If you are a farmer or fisherman and are considering bankruptcy, consult an attorney to determine if you qualify for this type of bankruptcy. Chapter 12 is less complicated and less expensive and may be your best option.

• Chapter 13
o Chapter 13 allows individuals with regular income to develop a plan to repay some or all of their debts. Like a Chapter 11 plan, the debtor will propose a repayment plan and make installment payments to creditors. This process normally takes about 3 to 5 years.
o Any individual with unsecured debts of less than $360,475 and secured debts of less than $1,081,400 is eligible for relief under Chapter 13. Corporations and partnerships are not eligible for this type of bankruptcy.
o Individuals often choose this form of bankruptcy over Chapter 7 to avoid liquidation of assets and home foreclosure.