Legalities of Bankruptcy

Up to your ears (and over) in debt and don't know what to do or where to turn?  If you are thinking about bankruptcy, your finances must be in bad shape. You should gather information before you decide on any course of action to straighten out your financial situation. Bankruptcy may or may not be the best solution for you regardless of how serious your financial trouble feels.  You can begin your education on bankruptcy here.

The US Bankruptcy Code

Under the United States Constitution, Article 1, Section 8, 'The Congress shall have the power to establish an uniform Rule of Naturalization, and uniform Laws on the subject of Bankruptcies throughout the United States.' Cases are handled in bankruptcy courts in the 94 United States and U.S. Territories judicial districts.

The purpose of bankruptcy law stated by the Supreme Court in 1934 is to give an honest debtor a fresh start without worrying about previous debt.

Six Types of Bankruptcy Cases

Under Title 11 of the United States codes, there are six kinds of bankruptcy cases:

Chapter 7 - The simplest and easiest bankruptcy proceeding, it is usually called straight or liquidation bankruptcy. It can be used by individuals and businesses. The primary purpose of the Chapter 7 filing is to discharge all debts through the liquidation of assets.

Chapter 9 - This is for municipalities.

Chapter 11 - This is most often used by businesses, although it can be used by individuals.  It is often referred to as business reorganization bankruptcy, and allows business owners to restructure their business while being protected from creditors.

Chapter 12 - This is used by fishermen and family farmers.

Chapter 13 - It is a bankruptcy in which debts are reorganized but not forgiven. It is used both by businesses and also by individuals who have a regular source of income.  It involves making payments to the bankruptcy trustee for a period of three to five years.

The Bankruptcy Process

The process of bankruptcy is determined by the Federal Rules of Bankruptcy Procedure and the local rules of each bankruptcy court.  Most of the details of a bankruptcy case are handled away from the court.  Under chapter 7, 12, 13, and sometimes chapter 11 bankruptcy, administrative details are handled by the trustee appointed to the case, and the person(s) filing will not even see the bankruptcy court.  In chapter 11, the filer is required to appear at a meeting of your creditors.  With Chapter 13 bankruptcy, the filer may be required to meet with the bankruptcy judge to confirm debt repayment plans.

Individuals most commonly use chapter 7 and chapter 13 bankruptcy. Under chapter 7, all your assets are transferred to an estate managed by a trustee appointed by the U.S. Trustee Office who then pays your creditors. Under chapter 13, a debt repayment plan is created and debts are paid over a three to five year period.

Discharge of Debt

Not all debts can or will be discharged under bankruptcy. It varies according to the chapter of the Bankruptcy Code. When a debt is discharged, it means you don't have to pay the debt. Once it is discharged, the creditor cannot take any form of action to collect the debt. The length of time it takes to get debts discharged depends on the type of bankruptcy filed for. A chapter 7 bankruptcy is the quickest. Since other chapters include a payment schedule, the time varies accordingly.

Bankruptcy is a big step, and one that shouldn't be undertaken without complete information. It needs to be considered as a last resort and not as an easy fix.  It is not that. Bankruptcy has far reaching consequences into the filer's near and distant futures.

Alternatives to Bankruptcy