Bankruptcy basics are simple: bankruptcy is the legal system’s remedy for debts beyond the ability of the person who owes money to pay.
It is governed by the federal law found in Title 11 of the United States Code.
As federal law, it supersedes any conflicting state law. That’s the operation of the Supremacy Clause of the Constitution in action.
With the exception of exemptions , it is the same from state to state. However, like anything man-made, it varies in practice as different courts apply the same law to the facts before them.
Bankruptcy in the United States seeks to benefit both debtors and creditors by seeing that debtors get relief from debts they can’t pay, and that creditors get paid from whatever assets the debtor does not need for basic living.
Bankruptcy basics: the chapters
There are four kinds of bankruptcy proceedings that impact individuals and businesses. They are referred to by the chapter of the federal Bankruptcy Code that describes them.
Chapter 7
Chapter 7 is the most common form of bankruptcy. It is a liquidation proceeding in which the debtor’s non-exempt assets, if any, are sold by the Chapter 7 trustee and the proceeds distributed to creditors according to the priorities among creditors established in the Code.
Chapter 7 is available to individuals, married couples, corporations and partnerships. Individual debtors get a dischargewithin 4-6 months of filing the case.
If there are assets which are not removed from the bankruptcy estate by an exemption, the trustee takes control of those assets, sells them and pays creditors as much as the proceeds permit.
Any wages the debtor earns after the case is begun belong to the debtor; the creditors have no claim on those earnings. More about Chapter 7.
Chapter 11
Chapter 11 is a reorganization proceeding, typically for corporations or partnerships. Individuals, especially those whose debts exceed the limits of Chapter 13, may file Chapter 11.
In Chapter 11, the debtor usually remains in possession of his assets and continues to operate any business, subject to the oversight of the court and the creditors committee.
The debtor proposes a plan of reorganization which, upon acceptance by a majority of the creditors, isconfirmed by the court and binds both the debtor and the creditors to its terms of repayment.
Plans can call for
- repayment out of future profits,
- sales of some or all of the assets, or
- a merger or recapitalization.
More about Chapter 11.
Chapter 12
Chapter 12 is a simplified reorganization for family farmers, modeled after Chapter 13, where the debtor retains his property and pays creditors out of future income.
Chapter 13
Chapter 13 is a repayment plan for individuals with regular income and, since May, 2022, total debts under $2.75 million.
The debtor keeps his property and makes regular payments to the Chapter 13 trustee out of future income to pay creditors over time (3-5 years).
Repayment to creditors in Chapter 13 can range from next to nothing to 100% depending on the debtor’s income, the value of his assets and the make up of the debt.
Certain debts that cannot be discharged in Chapter 7 can be discharged in Chapter 13. Chapter 13 also provides a mechanism for individuals to prevent foreclosures and repossessions, while catching up on their secured debts, unpaid taxes, or delinquent child support. How Chapter 13 works.
Beyond bankruptcy basics
You can read the Code itself. Or, (I knew you’d be interested in an alternative to that) you can continue exploring this site for a non technical overview of bankruptcy basics.
Can I get credit after bankruptcy
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