Bankruptcy Primer

Bankruptcy has a long and history in the United States.  The evolved bankruptcy system begins with a set of mostly federal statutes (laws passed by Congress); rules of bankruptcy procedure; and individual court rules, all of which are ultimately provided for by Article I, Section 8 of the U.S. Constitution.  While federal in nature, there is significant crossover and connection to state law, the comprehension of which can be crucial in dealing with the protection of assets and dealing with certain claims.

 

The Bankruptcy Code (the set of laws found in sections 101 to 1532 of title 11 of the U.S. Code) is divided into nine groups of sections referred to as chapters.  Six chapters (7, 9, 11, 12, 13 and 15) deal with distinct types of bankruptcy filings.  The two most common types of consumer bankruptcy filings are provided for by chapters 7 and 13 of the Code.

Chapter 7 is a form of bankruptcy available to individuals who meet certain income thresholds.  While chapter 7 bankruptcy filings are also called “liquidating bankruptcies,” in practice, most individual chapter 7 cases filed by individuals do not result in property being taken by a trustee for the purpose of selling (liquidating) to pay back debts.  However, because a chapter 7 trustee is appointed in every case to review the petition and schedules, verify income, search for assets subject to liquidation and review other issues, all income, assets and a good deal of other financial disclosures must be properly disclosed.  It is therefore highly advisable that anyone filing for bankruptcy protection hire a competent and experienced attorney to protect the filer’s interests.  Without such representation, the filer is ultimately on their own, up against the trustee, his or her creditors, and, ultimately, the judicial system, none of whom have an interest in protecting his or her interests.

 

Chapter 13 is a form of bankruptcy available exclusively to individuals that have below certain thresholds of unsecured (e.g. credit card) and secured (e.g. mortgage) debt and who have some amount of disposable income available after all living expenses each month.  The disposable income is devoted to a trustee for five years (or sometimes three) who with those payments pays a portion of the debt incurred prior to filing (and in some cases debt incurred after filing) pursuant to a court-approved plan of repayment.  After the plan has been approved by the Court and fully executed by the debtor he debtor will be eligible for a discharge. Chapter 13 bankruptcies provide for other mechanisms, such as dealing with mortgages that are in default, removing certain liens from property.