Introduction to The Bankruptcy Code - Chapters 7, 11, and 13
In today’s unstable economy, many of us find ourselves unable to make ends meet. Payments on credit cards, college loans, divorce settlements, or everyday household expenditures can be too much to handle. Many people have found themselves in serious debt with no apparent way out. With unemployment rates being so high, and the job market being as it is, many of us have found ourselves living on credit. So it’s no surprise that the number one cause of bankruptcy in the United States is due to excessive credit card debt. More recently, medical expenses have become a prevalent cause of bankruptcy filings, causing over 40% of bankruptcies in America. Other significant causes for bankruptcy today are loss of employment, excessive loan payments, divorce, and disaster.
Filing for bankruptcy can be a way for you to reorganize your debt, it can also be used to prevent repossession, loss of utilities, and to avoid foreclosure. In 1934, the Supreme Court stated that bankruptcy “gives to the honest but unfortunate debtor…a new opportunity in life and a clear field for future effort, unhampered by the pressure and discouragement of preexisting debt.” The U.S. Constitution permits Congress to establish “uniform laws on the subject of bankruptcies.” This authority allowed for the establishment of a federal law that governs all bankruptcy filings, known as the Bankruptcy Code, to be enacted in 1978.
Filing for bankruptcy releases the debtor from liability for their specific debts and prevents creditors or collection agencies from taking further actions to attempt to collect those debts. There are six official forms of bankruptcy outlined in the Bankruptcy Code, but most are filed as Chapter 7, Chapter 11, or Chapter 13.
Chapter 7: Straight Bankruptcy
This chapter of the Bankruptcy Code provides for the “liquidation of assets.” That is, the consolidation and sale of the debtor’s property and its distribution to the creditors. This process is done by having a trustee assume assets of the debtor’s estate, reducing them to cash values, and distributing the profit to creditors. This process provides relief to the individual, allowing for a discharge of debt in exchange for property proceeds.
However, there are restrictions that give the debtor the right to retain some property that may be exempt from the rights of the creditors. Exempt property includes such items as old vehicles, clothes, household items, etc. In many Chapter 7 filings, there are no assets to be liquidated, due to the lack of eligible property. These are referred to as no-asset cases, in such cases the debtor will not have to turn over anything for the creditors.
The Chapter 7 bankruptcy process allows for discharge of certain kinds of debt, typically for an individual or a married couple. Discharge of debt allows an honest debtor to be released from their liability to pay for certain types of debt, including medical, credit and loans. While not all debt may be discharged, filing a Chapter 7 may help lessen the amount. In 2005 a test was introduced to assess of the necessity and eligibility of an individual to file for bankruptcy under Chapter 7 of the Bankruptcy Code. If an individual fails this test they will no longer be eligible to file under Chapter 7 and must file for bankruptcy under Chapter 13.
Chapter 13: Wage Earner Bankruptcy
This chapter of the Bankruptcy code allows for those individuals with steady incomes to repay their debts, partially or in full, at a more manageable rate. This rate is determined by the court and outlined in a rehabilitation payment that provides for an agreed upon monthly payment from the debtor. Under this chapter, the debtor may retain their assets but must agree to devote a portion of their income to repaying creditors over a given period of time, typically over the course of 3-5 years. The length of payment depends upon your monthly income; those whose income is above the state’s median will pay for a longer period of time than those whose income is below. There are stipulations on this chapter varying from state to state, but the rehabilitation plan cannot exceed five years. Upon completion of the payments as defined in the plan, the debtor will be dismissed of all debts provided in the plan. However, failure to adhere to the regulations of the payment plan, such as failure to pay or making changes without court approval, may result in a dismissal of the case. A dismissal will allow for creditors to resume collection on the full amount of the remaining debt.
Chapter 11: Corporate Bankruptcy
This form of bankruptcy typically applies to businesses; however it can apply to those individuals who have accrued substantial debts and assets. This type of bankruptcy allows for companies and businesses to attempt to continue to function normally whilst following a repayment plan. Similar to Chapter 13, a payment plan will be devised for repayment of debt. However, in a Chapter 11 bankruptcy filing, the repayment plan will be devised by the debtor and creditor under court supervision. Unlike Chapter 13 bankruptcy, where creditors have no say in the payment plan set into place, Chapter 11 allows for creditors to weigh in on the proposed repayment plan.
The three remaining types of bankruptcy are far less common, they are Chapters 9, 12, and 15 of the Bankruptcy Code. Chapter 9 allows for a federal intervention and plan for the resolution of public debts. Chapter 12 calls for rehabilitation plans specifically for fishermen and farmers. Finally, Chapter 15 deals with settlement or restitution for foreign or international creditors and/or debtors. Visit the Bankruptcy Basics page at www.uscourts.gov for additional bankruptcy information, forms and resources.
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