Personal Bankruptcy Questions

Bankruptcy is a financial status of a person or business entity whose capacity to pay its creditors has been impaired or in other words is insufficient. In legal terms, it is a lawful declaration of the debtor’s inability to pay its creditors and a series of procedures is adopted to release or modify the insolvent debtor of his or her debt obligations. A bankruptcy petition can be filed by individuals, associations and corporations whose assets are not greater than their liabilities.

The Bankruptcy Law of the United States refers to the 1978 Bankruptcy Reform Act as Codified in The Unites States Code under Title 11. It is also known as the Bankruptcy Code.

Under the Bankruptcy Law there are six types of bankruptcy that a bankrupt debtor can file for. Individuals and businesses who petition under Chapter 7 of the Code are going for the liquidation of their properties to pay creditors. Properties of individuals are declared as exempt and non-exempt and only those non-exempt assets are available for satisfaction of the creditors. The existence of exemptions such as personal effects is for the orderly management of the bankruptcy proceeding which is one of the objectives of the Bankruptcy Law.

The Chapter 13 proceeding is for individuals whose assets are less than their personal liabilities but who are currently employed and are earning regular income. In this petition for relief is the election of adjustment where creditors’ claims are frozen until the debtor has drafted a plan to pay them through his or her income. Under this provision, the debtor retains his or her properties upon approval of the court and the creditors.

Chapter 11 of the Code stipulates the reorganization or the rehabilitation of business organizations and in some rare cases of individuals who have substantial assets to pay off their debts. The procedure for payment is the same as Chapter 13. The other three types of bankruptcy are the municipal bankruptcy or Chapter 9 of the Code, Chapter 12 which is the rehabilitation of fishermen and farmers and the Chapter 15 that refers to international and ancillary cases. Chapters 7, 13, 11 and 12 call for a trustee or a person appointed by law to supervise and manage the proceedings. The bankruptcy system also provides debtor or the trustee representing the right to avoid certain legal transactions that accelerate the financial demise of the debtor prior to the legal declaration of bankruptcy. This feature is called avoidance action.

Petition for bankruptcy may be voluntary or involuntary depending on who initiates the filing. Involuntary bankruptcy happens more often in business settings where creditors file for the petition to recover what they could from an insolvent company. Voluntary bankruptcy is the most common filing where it is the debtor himself or herself who petitions to the US Bankruptcy Court found in each state.

It is the Federal Law which governs the procedure of bankruptcy cases, but it leaves some provisions up to the state where the petition is filed.

Click here for more information on US Federal Bankruptcy Law.