The legal proceedings when an individual or company is unable to pay any outstanding debts to their creditor is known as bankruptcy. It helps people burned with debt find freedom from their financial responsibilities while helping to pay creditors some of the money back through the sale of assets or repayment plans. In Pennsylvania, all bankruptcy cases are governed by the US Bankruptcy Code and handled in federal court. As such, bankruptcy filing in Pennsylvania is, for the most part, the same as in any other state. However, the bankruptcy laws in Pennsylvania also come into play, determining the debtor's exemption rights and what property is protected.
In this article, we discuss Pennsylvania bankruptcy laws and the different options available when filing for bankruptcy as detailed in the federal code. We then go through a step-by-step process on how to file for bankruptcy and the Pennsylvania bankruptcy exemptions used to protect property from creditors.
What is Bankruptcy Law in Pennsylvania?
Pennsylvania bankruptcy laws outline the legal process in which debtors and creditors settle unpayable debts. During a bankruptcy case, the courts will appoint a trustee whose role is to determine the best course of action to ensure the creditors receive as much of the money owed as possible while relieving the debtor of their financial burdens. In many cases, this involves the dissolution of assets and property not covered by Pennsylvania bankruptcy exemptions to partially pay creditors what they are owed. Any remaining debts are then wiped. Alternatively, a structured repayment plan lasting from three to five years can help the debtor handle their financial responsibilities and give them time to clear their debts.
What is the Purpose of Bankruptcy Law?
The main objective of Pennsylvania bankruptcy laws is to regulate the legal procedure of debt collection. Anyone in the U.S. can file for bankruptcy, be that individuals, spouses, small businesses, or larger corporations. For these people, bankruptcy laws act as a legal lifeline enabling them to settle overburdening debts. Creditors alsotoo benefit from bankruptcy laws, with the laws aiding lenders in collecting any outstanding balances.
Therefore, bankruptcy laws in Pennsylvania serve three key purposes:
1) To remove the legal obligation of repayment and to discharge any outstanding debts fairly through federal court. This benefits the debtor, helping them gain access to a fresh start in life and removes the stress and legal obligations of outstanding debts.
2) To use alternate means to collect the outstanding balance of any debts that companies or individuals are unable to pay back normally. According to Pennsylvania bankruptcy laws, this could be through the sale of assets or structured repayment plans. This benefits the creditor, helping them gain some or all of the funds owed by the debtor.
3) To reorganize and restructure debts owed by larger firms rather than liquidating their assets. This benefits both the debtor and the creditor. It allows big corporations an opportunity to overcome their debts without the business coming to an end, while usually giving creditors a greater return on their debts than they otherwise would.
Types of Bankruptcies in Pennsylvania
The U.S. Bankruptcy Code is divided into chapters, with each chapter defining and detailing the legal proceedings for unique types of bankruptcy claims. In total, Pennsylvania bankruptcy laws lay out six different types of bankruptcies. Which one the debtor should file for depends on who is filing the claim and the overarching goals of the debtor. The majority of cases fall under Chapter 7, Chapter 11, or Chapter 13, which are explained here in detail. We also take a briefer look over the three remaining types,: Chapters 9, 12, and 15.
Chapter 7: Liquidation
Chapter 7 bankruptcy can be filed for by individuals, small businesses, and large firms. Also known as “liquidation bankruptcy” or “straight bankruptcy”, debtors filing for Chapter 7 are required to sell their assets to pay off any outstanding unsecured debts. According to Pennsylvania bankruptcy laws, the federal courts will appoint a trustee who is responsible for selling assets in the order of “absolute priority” detailed in Section 1129(b)(2) of the U.S. Bankruptcy Code. The list of Pennsylvania bankruptcy exemptions states the property that the debtor is entitled to keep, – they will never be required to sell everything they own. After the assets are sold, all remaining debts are legally removed.
Chapter 11: Large Reorganization
Chapter 11 bankruptcy is usually reserved for large companies.; h However, individuals with extremely large outstanding debts can also file for this type of claim. Also known as “reorganization bankruptcy”, the outstanding balance is not immediately paid through the sale of assets. Instead, the court’s trustee restructures the debts while business continues as usual. The bankruptcy laws in Pennsylvania mandate that the debtor is obliged to pay off their debts with the company’s future earnings, but it does provide an opportunity for the corporation to emerge as a healthy business. However, if unsuccessful, the company will have to file for a Chapter 7 bankruptcy to settle any remaining debts.
Chapter 13: Repayment Plan
Chapter 13 bankruptcy can also be claimed by both individuals and businesses. It is a great option for anyone wishing to keep all of the property that they own, including property not detailed in Pennsylvania bankruptcy exemptions. Known alternatively as “repayment plan bankruptcy” or “debt adjustment bankruptcy”, the courts determine a plan in which the debts will be paid back within the next three to five years. Over this time, the entire outstanding balance will be repaid to the creditor. This does mean that the debts will also last for up to five years but comes with the benefit of keeping all exempt and non-exempt property.
Chapter 9: Municipalities
Chapter 9 bankruptcy is solely for use by monetarily distressed municipalities, inclusive of villages, towns, boroughs, and cities. Pennsylvania bankruptcy laws stipulate that municipalities are never required to sell assets to pay off any debts. Instead, the courts will define a repayment plan that sees the outstanding balance paid back over time.
Chapter 12: Family Farmers
Chapter 12 bankruptcy is used exclusively by family farmers and fishermen that have a regular annual income. As with Chapters 9 and 13, this type of bankruptcy works by creating a repayment plan to pay all outstanding balances back to the debt collections. The repayment plans last up to five years during which time business can continue as usual.
Chapter 15: Cross-Border Cases
Chapter 15 bankruptcy is only used in cross-border cases. Examples include where the debtor lives in one country whereas their assets are held in another. Alternatively, it could be that the creditors are based overseas. It is one of the latest adaptations of Pennsylvania bankruptcy laws, intended to enable effective communication between the U.S. and another foreign country.
How to File for Bankruptcy in Pennsylvania
Although Pennsylvania bankruptcy laws permit the debtor and creditor to file for bankruptcy, it is usually the debtor that starts the legal proceedings. They must formally declare bankruptcy by filing a petition with the U.S. federal court. This can be done with or without legal counsel. However, appointing a bankruptcy attorney specializing in bankruptcy laws in Pennsylvania is beneficial to the debtor. The process involves completing many complex legal documents which must be filled out correctly or the courts may dismiss the case.
Alongside these legal U.S. bankruptcy documents, bankruptcy laws in Pennsylvania state there are several things that the debtor has to do before and after filing the petition. Here is a look at the entire process in more detail from start to finish:
1) Financial Records: The first thing any debtor declaring bankruptcy must do is compile a list of all assets, income, and expenses, and total debts owed. The debtor will need to present this information to the courts. Gathering this information enables the appointed trustee to know as much about their financial situation as possible and which is the best course of action to take. This information is also required for pre-bankruptcy credit counseling.
2) Pre-Bankruptcy Credit Counseling: It is mandated in Pennsylvania bankruptcy laws that anyone filing for bankruptcy must go through pre-bankruptcy credit counseling. During this process, the debtor will be appointed a counselor who will look over all of their finances. Their job is to determine any way in which debts can be paid without declaring bankruptcy. Once the counseling is complete, the debtor will receive a certificate, which also needs to be presented to the courts. It confirms that all other avenues of repayment have been exhausted and proves to the courts that bankruptcy is the only viable option.
3) Bankruptcy Petition: At least 180 days after credit counseling is completed, the debtor can file a bankruptcy petition. If not done so already, this is the time to appoint an attorney to help with the legal documentation. All forms that need completing can be found on the U.S. Courts website and include forms that detail the debtor’s tax returns, proof of income, identification, valuation of assets, and more. In the petition, the debtor needs to detail which type of bankruptcy they are filing for.
4) Creditor’s Meeting: After the courts have accepted the petition and appointed a trustee for the case, the debtor must attend the 341 creditor’s meeting. During this meeting, creditors can ask questions about the debtor’s financial situation.
Following these steps, the trustee will take care of the rest, either selling assets to relieve the debtor of their financial burden or structuring a repayment plan. The debtor needs to attend a final confirmation hearing before receiving a debt discharge.
Pennsylvania Bankruptcy Exemptions
Many debtors filing for bankruptcy are concerned that doing so will leave them empty-handed. There are fears that the courts will be able to seize all their property to hand over to creditors as a form of repayment. However, Pennsylvania bankruptcy exemptions prevent this from happening. These exemptions list the type and value of the property that is legally protected from being distributed to creditors. In addition, federal non-bankruptcy exemptions can be used to supplement the state’s list for more comprehensive cover.Every state in the U.S. has its own list of exemptions, with some being more lenient than others. To use Pennsylvania bankruptcy exemptions, the debtor must be legally classified as a resident and have resided in the state for a minimum of 730 days before filing their claim. If not, the exemptions of the previous state apply or, where applicable, the debtor can opt to use the federal exemptions list.