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What Exactly is Bankruptcy?
The United States Constitution has a provision in Article I, Section 8, that allows Congress to establish "uniform laws on the subject of bankruptcies throughout the United States." Congress has established uniform laws on bankrupcy in Title 11 of the United States Code. There are a number of bankruptcy chapters that allow for relief from creditors, such as stopping garnishments, stopping foreclosure, stopping collection efforts and harrassing phone calls. There are also a number of chapters in the bankruptcy code that define the duties and responsibilities of debtors, creditors and those assigned to carry out the provisions of the law.
Chapter 7 is the first chapter in the bankruptcy code that allows for some relief from the obligations associated with debt, for example credit card debt, medical debt, check loans, etc. Chapter 7 is often referred to as a full bankruptcy or liquidation bankruptcy. It is designed for debtors who no longer have an ability to pay their ongoing obligations. There is an income qualification determined by a "means test" to establish a threshold eligibility requirement.
Chapter 9 is to assist towns, cities or other governmental agencies to obtain relief from the pressures of associated obligations.
Chapter 11 allows business entities to remain in business through a reorganization of the obligations threatening its ability to remain in business. By giving a company some breathing room, it can emerge from bankruptcy a much healthier business operation.
Chapter 12 is a temporary chapter to assist family farmers and commercial fishermen to reorganize their businesses with provisions based on the unique nature of the fishing and farming harvest seasons.
Chapter 13 is a repayment plan for debtors with an ability to pay something to creditors. Chapter 13 is designed to allow for relief from credit card debt, medical debt and other overwhelming financial concerns without liquidating assets. It gives debtors with regular income an opportunity to get caught up on past due obligations while making ongoing payments. Chapter 13 can stop a foreclosure and allow a family to remain in their home and pay the deliquency over time. It is based on the debtors ability to pay something to their creditors while maintaining a workable budget for normal living expenses.
Once a bankruptcy petition is filed in any chapter under the Bankruptcy Code, an automatic stay goes into effect that prohibits creditors from attempting to collect on a debt, from continuing with any judicial process, stops foreclosure proceedings, stops garnishments and prohibits creditors from maintaining any control over assets of the estate, such as repossession of cars, trucks or other assets, as well as a number of other prohibitions. The debtor is then able to proceed with a Chapter 7 liquidation, a Chapter 13 reorganization or some other plan which will enable the debtor to the relief requested.
The goal is to emerge from Bankruptcy with an ability to move forward, either with a discharge from burdensome medical debt or credit card debt, or through reorganizing the obligations to enable the debtor to pay creditors something, stop foreclosure and retain property necessary to the debtor’s reorganization, such as a home or car.
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