What is Bankruptcy?
Bankruptcy law allows for the development of a plan that will allow a debtor unable to pay his or her creditors, to resolve his or her debts by supervised division of his or her assets equally among the creditors. Some forms of bankruptcy proceedings allow the debtor to stay in business, using the revenue from the business to resolve the owed debts. Additionally, bankruptcy law is in place to grant certain debtors the chance to discharge (free themselves) of the financial obligations they have accumulated through distribution of their assets. This discharge can occur even if the debts have not been paid in full.
Bankruptcy is Federal Law
Bankruptcy law is a federal statutory law that is contained in the Title 11 of the United States Code. The Bankruptcy Code was passed by Congress under its Constitutional grant of authority to “establish…uniform laws on the subject of Bankruptcy throughout the United States." States are not able to regulate bankruptcy, but they are able to pass laws governing other aspects of the debtor-creditor relationship. Some sections of the Title 11 incorporate the debtor-creditor laws of those individual states.
Two Types of Bankruptcy Proceedings
Bankruptcy is essentially divided into two general categories.
Chapter 7 – A trustee is appointed to collect the non-exempt property of the debtor. The trustee sells it and then distributes the proceeds to the creditors
Chapter 11, 12, 13 – Rehabilitation of the debtor in order to allow him or her to use future earnings to pay off creditors.