Bankruptcy enables a person who is unable to pay their creditors to resolve all outstanding debts.
This is achieved by either: dividing assets (if there are any) among creditors, or preparing and submitting a plan that the debtor can afford to repay some or all creditors over time. This process is supervised by a bankruptcy trustee who ensures that the interests of all creditors are treated equally. The main purpose of bankruptcy law is to allow a person to completely free himself of the financial obligations they have accumulated even if their debts have not been paid in full through a legal process known as “discharge of debt.”
Bankruptcy Law Is A Federal Statute
Bankruptcy law is a Federal law contained in Title 11 of the United States Code. Congress passed the Bankruptcy Code under its Constitutional grant of authority to “establish… uniform laws on the subject of Bankruptcy throughout the United States.” See U.S. Constitution Article I, Section 8. States may not regulate bankruptcy though they may pass laws that govern other aspects of the debtor-creditor relationship. A number of sections of Title 11 incorporate the debtor-creditor law of the individual states.
United States Bankruptcy Courts Handle Bankruptcy
Bankruptcy proceedings are supervised by and litigated in the United States Bankruptcy Courts. These courts are a part of the District Courts of The United States. The United States Trustees were established by Congress to handle many of the supervisory and administrative duties of bankruptcy proceedings. Proceedings in bankruptcy courts are governed by the Bankruptcy Rules which were promulgated by the Supreme Court under the authority of Congress.
There are two basic types of Bankruptcy for consumers –
A filing under Chapter 7 is called liquidation. It is the most common type of bankruptcy for consumers. Liquidation involves the appointment of a trustee who collects the non-exempt property of the debtor, sells it and distributes the proceeds to the creditors paying creditors in order of priority, usually a small portion of the debt owed and discharging the remaining debt. However, In most cases, the debtor does not have any assets to sell, but the debts are still discharged.
Bankruptcy proceedings under Chapter 13 the debtor submits a payment plan to the trustee for approval allowing the debtor to use future earnings to partially or fully pay off creditors. Under Chapter 13, a trustee is appointed to supervise the assets of the debtor and administer the payments from the debtor and to the creditors.
Voluntary or Non-Voluntary
A bankruptcy proceeding can either be entered into voluntarily by a debtor or initiated by creditors. Non-voluntary or Involuntary bankruptcies are rare, but possible.
The Automatic Stay
After a bankruptcy proceeding is filed, an automatic stay immediately goes into effect barring creditors, for the most part, from collecting their debts.
The debtor is not allowed to transfer property that has been declared part of the estate subject to proceedings. Furthermore, certain pre-proceeding transfers of property, secured interests, and liens may be delayed or invalidated. Various provisions of the Bankruptcy Code also establish the priority of creditors’ interests.
Retirement Accounts are Protected
A recent decision by the US Supreme Court has shifted this power a little bit towards the debtor. In Rousey v. Jacoway, (April 4th, 2005), the Court held that assets in Individual Retirement Accounts (IRA’s) are protected under 11 U.S.C § 522(d) and thus exempt from withdrawal from the bankruptcy estate. This decision has broad implications for the baby-boomer generation, providing millions of Americans nearing retirement with increased protection of their earnings.
Creditors Try To Make It Hard For Consumers
Recent passage of the Bankruptcy Prevention and Consumer Protection Act in April 2005 made major reforms in bankruptcy law, outlining revised guidelines governing the dismissal or conversion of Chapter 7 liquidations to Chapter 11 or 13 proceedings. The law also expands the responsibilities of the United States Trustees Program to include supervision of random and targeted audits, certification of entities to provide credit counseling that individuals must receive before filing for bankruptcy, certification of entities that provide financial education to individuals before being discharged from debt, and greater oversight of small business Chapter 11 reorganization cases.