Bankruptcy is a legal proceeding involving a person or business that is unable to repay outstanding debts. The bankruptcy process begins with a petition filed by the debtor, which is most common, or on behalf of creditors, which is less common. All of the debtor’s assets are measured and evaluated, and the assets may be used to repay a portion of outstanding debt. A debtor declares bankruptcy to obtain relief from debt, and this is normally accomplished either through a discharge of the debt or through a restructuring of the debt. When a debtor files a voluntary petition, his or her bankruptcy case commences. Bankruptcy offers an individual or business a chance to start fresh by forgiving debts that simply cannot be paid, while offering creditors a chance to obtain some measure of repayment based on the individual’s or business’ assets available for liquidation.
While bankruptcy cases are always filed in United States Bankruptcy Court (an adjunct to the U.S. District Courts), bankruptcy cases, particularly with respect to the validity of claims and exemptions, are often dependent upon State law. A Bankruptcy Exemption defines the property a debtor may retain and preserve through bankruptcy. Certain real and personal property can be exempted on “Schedule C” of a debtor’s bankruptcy forms, and effectively be taken outside the debtor’s bankruptcy estate. Bankruptcy exemptions are available only to individuals filing bankruptcy. After a bankruptcy petition is filed, the court schedules a hearing called a 341 meeting or meeting of creditors, at which the bankruptcy trustee and creditors review the petitioner’s petition and supporting schedules, question the petitioner, and can challenge exemptions they believe are improper.
Bankruptcy filings in the United States fall under one of several Chapters of the Bankruptcy Code located at Title 11 of the United States Code: Chapter 7, which involves liquidation of assets; Chapter 11, which deals with company or individual reorganizations; and Chapter 13, which is debt repayment with lowered debt covenants or payment plans. Bankruptcy filing specifications vary among states, leading to higher and lower filing fees depending on how easily a person or company can complete the process.
An important feature applicable to all types of bankruptcy filings is the automatic stay. The automatic stay means that the mere request for bankruptcy protection automatically halts most lawsuits, repossessions, foreclosures, evictions, garnishments, attachments, utility shut-offs, and debt collection activity.
The most common types of personal bankruptcy for individuals are Chapter 7 and Chapter 13. Chapter 7, known as a “straight bankruptcy” involves the discharge of certain debts without repayment. Chapter 13, involves a plan of repayment of debts over a period of years. Whether a person qualifies for Chapter 7 or Chapter 13 is in part determined by income. Corporations and other business forms normally file under Chapters 7 or 11.