Bankruptcy law allows debtors, who are unable or partially unable to pay outstanding debts, to rid themselves of these debts and obtain a fresh start. As stated by the United States Supreme Court, bankruptcy gives "the honest but unfortunate debtor ... a new opportunity in life and a clear field for the future, unhampered by the pressure and discouragement of preexisting debt." (Local Loan Co. v. Hunt, 292 U.S. 234, 244 (1934)).
Federal bankruptcy law consists of statutes published in the Bankruptcy Code (11 U.S.C. § 101-1330). In addition, state statutory law on bankruptcy also address areas delegated to states or not covered by federal law. Debtors usually file bankruptcy cases in Federal Bankruptcy Court (an adjunct of the Federal District Courts).
What is bankruptcy law?
A debtor filing for bankruptcy freezes actions taken by creditors (such as lawsuits, wage garnishments, and collection letters) against the debtor. In legal terms, the court orders a stay on actions by creditors against the debtor. The court notifies creditors of the bankruptcy proceeding and orders them not to contact the debtor to try to collect the debt. From this point, creditors may only seek repayment from the debtor within the bankruptcy proceeding. However, creditors have the right to contest the bankruptcy by initiating an adversarial proceeding. After bankruptcy is final, creditors who attempt to collect a debt covered by the bankruptcy may be punished for contempt of court.
Certain debts cannot be cleared (or "discharged") in bankruptcy, such as most taxes, most student loans, alimony, child support, court fines, debts of restitution owed for committing a criminal act, and debts arising from personal injury inflicted while driving under the influence. Debts not listed by the debtor in the bankruptcy filing are not discharged. A bankruptcy judge may refuse a claim upon a finding of dishonesty by the debtor in listing debts.
A debtor may only file for bankruptcy once every eight years. In addition to voluntary bankruptcy filed by a debtor, a creditor can initiate bankruptcy proceedings against a debtor. Bankruptcy filings appear on credit reports for ten years and may impact the ability to obtain credit. Debtors may voluntarily pay debts discharged through bankruptcy, but have no legal obligation to do so.
What are the different types of bankruptcy?
The Bankruptcy Code provides for six different types of bankruptcy, each known by the chapter in the Bankruptcy Code in which it is located. Although they differ in form and procedure, they all provide for permanent relief from certain debts. In bankruptcy terms, the debtor's dischargeable debts are discharged. Most debtors file for bankruptcy under Chapters 7, 11, and 13.
Chapter 7 provides for liquidation of the debtor's non-exempt assets. Certain assets, such as a home or car, may be exempt from bankruptcy. A court-appointed trustee conducts the sale of debtor's non-exempt assets and distributes the proceeds to creditors. Both individuals and businesses may file for bankruptcy under Chapter 7.
Chapter 9 provides for the reorganization of municipalities (which includes cities, towns, villages, taxing districts, municipal utilities, and school districts).
Chapter 11 is usually relied upon by partnerships and corporations. It provides for a supervised reorganization of a business, and allows the debtor to maintain the business while implementing a payment plan confirmed by the court.
Chapter 12 contains bankruptcy provisions applicable to family farmers and fisherman.
Chapter 13 provides for bankruptcy of an individual with a regular income, which is used to make a payment plan to pay debts, usually within three to five years.
Chapter 15 applies to cross-border bankruptcies. It adopts and implements the United Nations' Model Law on Cross Border Insolvency.