Bankruptcy is a legal procedure for dealing with debt problems of individuals and businesses. The primary purposes of bankruptcy are:
- to give the person filing for bankruptcy a "fresh start" by relieving the debtor of most debts by giving him or her a “discharge,” and
- to repay creditors (the persons who the debtor owes money) in an orderly manner to the extent that the debtor has property available for payment.
There are five basic types of bankruptcy cases provided for under the Bankruptcy Code, but only two are relevant for ordinary individuals. Chapter 7 bankruptcy requires the sale of a person’s property with the proceeds to be used to pay that person’s debts. This is called “liquidation.” Chapter 13 bankruptcy provides for the adjustment of debts. In this type of bankruptcy, a debtor is allowed to keep property and pay debts over a period of time, usually three to five years.
The information on this site is limited to individual bankruptcy only. If you are seeking information about filing a bankruptcy for a business, you MUST contact an attorney.
Bankruptcy begins with the debtor filing a petition with the bankruptcy court. However, prior to filing this petition, the debtor must obtain credit counseling from an approved provider. The credit counseling must occur within 180 days prior to filing a petition. Once credit counseling has been obtained, the debtor must file a statement of compliance and a certificate of credit counseling furnished by the provider. Failure to obtain credit counseling may result in dismissal of the case. To assist bankruptcy filers, the U.S. Trustee Program has created a list of approved credit counseling providers, located at http://www.justice.gov/ust/eo/bapcpa/ccde/cc_approved .htm.
The debtor’s first step is to collect his or her financial information, including bank statements, tax returns, pay stubs, creditor statements, and a list of the debtor’s assets (real property, investments, personal possessions, etc.).
Once information has been gathered, the debtor must decide what type of bankruptcy to file. Individuals generally will file either Chapter 7 or Chapter 13 bankruptcy. These types of bankruptcies are discussed in more detail later. To determine whether to file under Chapter 7 or Chapter 13 bankruptcy, the debtor must complete the “means test.” The means test looks at the debtor’s income and expenses to determine if a person’s income is low enough to file a Chapter 7 bankruptcy. If the debtor’s income is lower than a certain threshold, the debtor qualifies to file a Chapter 7 bankruptcy. If the debtor’s income is higher than a certain threshold, the debtor may not file under Chapter 7, but can still file a Chapter 13 bankruptcy. The “means test” is discussed in more detail under the section “Chapter 7 Bankruptcy.”
After the debtor decides what type of bankruptcy to file, he or she may begin filling out the petition. To prepare a bankruptcy petition the debtor must have accurate and up-to-date information on finances. The bankruptcy court will want to see information on a person’s income, debts and assets. In addition to the petition, a debtor will also need to file forms known as “schedules” that discuss the debtor’s assets, liabilities, and creditors in more detail. The petition, schedules, and other forms can be found at http://www.uscourts.gov/FormsAndFees/ Forms/BankruptcyForms.aspx.
Once the petition is filed, an injunction, called a “stay,” immediately goes into effect stopping the debtor’s creditors from taking any further action relating to the collection of debts. This means that the creditor will not be able to garnish wages, bring a lawsuit, or make a telephone call demanding payment without first getting approval from the bankruptcy court.
Following the filing of the petition, the debtor is required to attend a meeting with a court-appointed trustee. The purpose of this meeting, a 341 meeting, is to ensure that the debtor accurately represented assets and liabilities in the petition. The trustee will put the debtor under oath and ask questions about the debtor’s income and property. Creditors are also allowed to attend and may ask the debtor questions.
Following the 341 meeting, the debtor is required to attend a court-approved course in financial management. The court may refuse to discharge debts if the debtor fails to complete this course. This requirement is found in the U.S. Bankruptcy Code at 11 U.S.C. § 727 for Chapter 7 and 11 U.S.C. § 1328 for Chapter 13. A list of approved financial management courses can be found at http://www. justice.gov/ust/eo/bapcpa/ccde/de_approved.htm. If the court determines that no financial course exists near the debtor, the court may waive this requirement. However, if the court does not waive this requirement and the debtor fails to complete the course, the court may refuse to discharge the debtor’s debts.
The next step in the bankruptcy process often depends on the type of bankruptcy the debtor filed. In a Chapter 7 bankruptcy proceeding, the debtor must surrender any non-exempt assets to a trustee appointed by the court. Exempt property, which does not need to be surrendered, is discussed under “Chapter 7 Bankruptcy.” Once the trustee has received all of the non-exempt property from the debtor, the trustee will then sell all the non-exempt property for cash and distribute the cash to the debtor’s creditors. This process is called “liquidation.” Any debts not satisfied through the liquidation process are usually discharged within a few months, meaning the debtor is no longer responsible for paying those debts.
In a Chapter 13 bankruptcy proceeding, the debtor normally keeps all nonexempt assets and creates a plan to repay debts within a three-to-five year time period. The nonexempt assets can be retained so long as the total of the payments made under the plan exceed the value of the nonexempt assets. The repayment plan must be approved by the court. Once approved, the debtor makes payments to a court appointed trustee, who distributes the payments to the creditors. Once the payment plan is completed, the debtor may receive a discharge of other outstanding debts.
In both Chapters 7 and 13 bankruptcy cases litigation may be started to determine the true owners of property, the value of property, how much debt is owed, and whether the debtor should be discharged from certain debts. These cases are called “adversary proceedings.” Litigation in bankruptcy court is similar to litigation in civil cases; there may be discovery, pretrial proceedings, settlement efforts, and a trial.