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Bankruptcy Law in the United States

In situations where businesses or individuals find themselves unable to repay debt, the government offers multiple types of resolutions that fall under U.S. bankruptcy law.

What is Bankruptcy Law?

Bankruptcy law is the set of laws created by the Department of Justice. The definition of bankruptcy law conceives that it applies to any situation where an individual, a business, or even a municipality within the state finds itself unable to repay its debts. The goal of most bankruptcy laws is to find a way to help individuals or businesses pay at least some of their debt in whatever fashion is most feasible.

How Does Bankruptcy Law Work?

The law created different types of bankruptcy for different situations, referred to as chapters. These chapters lay out the guidelines for that particular bankruptcy law.

Bankruptcy is a means of helping you pay your creditors and get a clean and fresh financial start. The process liquidates your assets in order to pay back creditors, or it creates a repayment plan without massive interest pushing you further into debt. 

Does Bankruptcy Involve a Legal Process?

Yes, bankruptcy involves a legal process. Bankruptcy has forms that have to be filled out by the person who is declaring bankruptcy, as well as forms filled out by the creditors or people to whom they owe money.

U.S. bankruptcy law applies to any situation which takes place in a bankruptcy court. Any unsecured creditors and unsecured debts can be handled in bankruptcy cases. During the bankruptcy process a judge will evaluate whether an individual debtor, company, or municipality has to repay creditors.This decision is based on information provided, such as income, assets, debt, and more. If the individual filing for bankruptcy is required to repay some or all of its creditors, the terms of bankruptcy and repayment will include who has to be paid, when, how much, and if there is any exempt property or assets involved in the case. 

Filing with U.S. Bankruptcy Law

If you file for bankruptcy, there are three main codes under which you can file as an individual, including Chapter 7, 11, and 13. An experienced bankruptcy law attorney can help you determine which one best suits your needs. Since federal courts have sole jurisdiction over any cases involving bankruptcy, the filings must take place at a federal level as opposed to state court.

  1. The first steps to filing for bankruptcy require you to fill out a petition, which is given to a bankruptcy court. This petition can be done as an individual, a married couple, or a corporation. 
  2. On the form, you are required to list the contact information of your creditors with the amounts still owed, your income, liabilities, and assets. 
  3. Once you fill out a bankruptcy petition, creditors are no longer allowed to hassle you. No more lawsuits or lawsuit threats, no garnishing wages, and no more demanding phone calls. 
  4. If you have any property of worth, it will often be liquidated to repay your debt. Otherwise, a bankruptcy attorney can help you set up a repayment plan. If you truly have no means available to pay the creditors, there are rare cases when your debts will be “discharged” without any objection. 

Types of Bankruptcy

There are a few different types of bankruptcy, depending on your situation and whether you are an individual or a business. 

Chapter 7: Liquidation

Chapter 7 bankruptcy involves liquidation, a process available to businesses and individuals. Assets are collected and liquidated, a process that simply means selling them off in exchange for actual cash, which is then used to pay off creditors. An individual who files for chapter 7 bankruptcy can receive a complete discharge of all of their debt by using this process. To be eligible for this type of bankruptcy, you must be an individual, a married couple, or a corporation. 

Chapter 13: Repayment Plan

Chapter 13 is the “wage earners plan,” which allows you to adjust your debts so that you can repay them within three to five years. This involves keeping track of the different forms, transfers, proceedings, dates, amounts, and deadlines. This type of bankruptcy is primarily used by individuals, and the goal is to use a person’s regular income and use it to repay debt  within a certain number of years. This is only available to people who have a qualifying amount of debt. To learn what qualifies you for this type of bankruptcy filing, you should speak with an attorney.

Chapter 11: Large Reorganization

Chapter 11 bankruptcy is referred to as reorganization. This means you have a means and plan for repayment over time. This is namely a way for businesses to create a reorganization plan for repaying part, if not all, of their debt. It helps businesses remain operational while they figure out a plan. Individuals are able to utilize this type of bankruptcy as well, but it is less common.

Chapter 12: Family Farmers

Chapter 12 is meant for family farmers and fishermen. The idea is very similar to that of chapter 11 in that it allows a farmer or a fisherman to reorganize their business, keep their business in operation, and develop a plan to repay all or part of their debt.

Chapter 15: Used in Foreign Cases

Chapter 15 is meant for situations that involve foreign countries. This is usually supplementary to the primary bankruptcy proceedings that a debtor is undergoing in their home country. The goal of this is to help someone who is a foreigner, perhaps living in their home country, still maintain cooperation and communication with the United States and pay off part of their debt not just in their home country, but in the US as well.

Chapter 9: Municipalities

Chapter 9 bankruptcy is a proceeding for municipalities, so it is meant to protect a city or a town from creditors while that municipality creates a plan to resolve whatever debt they still have. This is not something that a state can file for, only a municipality. Municipalities have to be legally insolvent at the time that they file for chapter 9 bankruptcy, but be in the process of negotiating a good-faith settlement for any creditors in order to resolve the outstanding amount of debt. 

What is an Example of Bankruptcy Law?

Chapter 13 bankruptcy law is one of the most common for consumers because it is easier to file than chapter 7. For example, chapter 7 has an income cap, which means your income cannot exceed a certain limit. Chapter 7 also requires you as the debtor to turn over any assets you have so they can all be liquidated to cover your outstanding debt. By comparison, chapter 13 does not require this. Instead, chapter 13 requires that you make a complete list of all the debt that you owe, and then create an individual repayment plan within the time frame of three to five years. All of your creditors have to approve this repayment plan, and the amount must be repaid every month in accordance with your plan. 

However, with a chapter 13 filing, creditors will end up receiving more money when compared to a chapter 7 filing. You must fulfill all the terms of the repayment plan within the agreed-upon amount of time in order for your debts to be fully discharged. It is less detrimental to your credit score and you get to keep your home and all of your assets during the process.

Is Bankruptcy a State Law or Federal Law?

Bankruptcy is a federal law. The bankruptcy code is part of the United States code, Title 11, 101. The main chapters in this federal law outline the different types of bankruptcy as listed above. 

As an example from bankruptcy law practice:

The Federal Government courts have sole jurisdiction over Chapter 7 Bankruptcy cases. Chapter 7 Bankruptcy allows people to overcome debt with a chance to acquire a new financial beginning. It relieves them from the debt by either liquidating their assets to repay their debt, or creating payment plans. Step one necessitates that you file a petition getting an individual Chapter 7 Bankruptcy court. You must then provide your wages, all the names and addresses of creditors that you owe money to along with the amounts, your assets, along with your other liabilities. Once it's filed, this paperwork prevents creditors from suing you, garnishing your wages, or calling you.

You should speak with an attorney to get a better idea of the best way to rectify your conditions. A bankruptcy attorney can help resolve questions and enable you to settle your claims, get back on your feet, and start living the way you deserve.

United States Bankruptcy Laws FAQ

Can I file for bankruptcy at my local court?
No. The Federal courts have sole jurisdiction over bankruptcy cases, which means you cannot go through a state court.
What is the purpose of bankruptcy?
Bankruptcy is there for those with debt to overcome their circumstances and get a fresh financial start. It relieves them of their debt by either liquidating their assets to repay their debt, or setting up repayment plans. The meaning of bankruptcy law is to regulate this process.
What is the first step to filing for bankruptcy?
The first step requires that you file a petition with a bankruptcy court.
Who can file a petition for bankruptcy?
An individual, a joint married couple, corporation, or entity.
What do I need to put on my petition?
You are required to list your income, each of the names and addresses of those creditors to whom you owe money along with the amounts, your assets, and your other liabilities.
If I file a petition, can the creditors still call and hassle me?
No. Once it is filed, it prevents them from suing you, garnishing your wages, or calling you.
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