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 – Chapter 7 Bankruptcy, also known “liquidation” or “straight liquidation,” is typically the fastest and easiest form of bankruptcy. Individuals, married couples, and businesses often use Chapter 7 bankruptcy protection to get rid of unsecured debts and various financial obligations such as back rent, medical bills, and credit card debt. 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.
Chapter 13 is typically for those who do not qualify for Chapter 7. Unlike Chapter 7, which wipes out your debt, is a way to reorganize your finances so that you are able to pay off some or all of your debts over a period of three to five years. Chapter 13, also known as a “wage earner’s plan,” requires an individual to have a regular income and be able to provide a plan to the court demonstrating they will be able to repay all or part of his/her debts.
