Bankruptcy

Bankruptcy originated at least as early as Roman times and today is mostly defined the federal law found in Title 11 of the United States Code.  Under the Supremacy Clause of the US Constitution, Title 11 preempts or supersedes conflicting state laws.  An important part of most bankruptcy filings is the law of exemptions, which are different from from state to state. 

The purpose of Bankruptcy Law is to provide relief to debtors and fairness among creditors.  Debtors get a “fresh start” and can become productive members of society while creditors are divided into priority classes in which all creditors participate equally with other creditors of the same class.  The automatic stay provides a breathing space for the debtor and avoids a rush by one creditor to grab assets ahead of other creditors.

Two types or “chapters” of bankruptcy are particularly important to individual debtors today: Chapter 7 and Chapter 13.

Chapter 7 (called “liquidation” or “regular bankruptcy”) is the most common form of bankruptcy.  It is a 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.  Debtors permitted to file under Chapter 7  include individuals, married couples, corporations and partnerships.

Chapter 13 (called “repayment) involves a repayment plan under which the debtor makes regular payments over time (3-5 years), which are paid to the Chapter 13 trustee and divided among the creditors.  The Chapter 13 debtor typically keeps his property.  Individuals may file a Chapter 13 bankruptcy petition if they have (a) regular income and (b) unsecured debt less than $360,475 and (c) secured debt less than $1,081,400. 

Most Chapter 13 repayment plans pay some but not all of the debt owed to creditors.  The amount repaid in Chapter 13 can range from 0% to 100% depending on the debtor’s income, the value of non exempt 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 and to strip off liens that are really unsecured.

Individual debtors in Chapter 7 get a discharge within 4-6 months of filing the case.  Debtors in Chapter 13 can get a discharge upon completion of the repayment plan, which is 3-5 years after approval.

USC Title 11 has other chapters for different types of bankruptcies.  These include Chapter 11 (reorganization typically for businesses and individuals with higher debt or income levels), and Chapter 15 (for cross-border insolvencies).