BANKRUPTCY

Bankruptcy law provides for the development of a plan that allows a debtor, who is unable to pay his creditors, to resolve his debts through the division of his assets among his creditors. This supervised division also allows the interests of all creditors to be treated with some measure of equality. Certain bankruptcy proceedings allow a debtor to stay in business and use revenue generated from operations to resolve his or her debts. An additional purpose of bankruptcy is to allow certain debtors to free themselves (to be discharged) of the financial obligations they have accumulated, after their assets are distributed, even if their debts have not been paid in full. This may or not pay some of the creditors - is it fair?

Each of the 94 federal judicial districts (not state) handles bankruptcy matters, and in almost all districts, bankruptcy cases are filed in the bankruptcy court. Bankruptcy cases are not  filed in state court and any proceedings in a state court may be taken over by a Bankruptcy filing.

These procedures are covered under Title 11 of the United States Code (the Bankruptcy Code). The vast majority of cases are filed under the three main chapters of the Bankruptcy Code, which are Chapter 7, Chapter 11, and Chapter 13.

Filing for Bankruptcy In 2005, the Bankruptcy Code was amended to require that most individual debtors complete a special briefing from an approved credit counseling agency before filing a bankruptcy case. In most states, the United States trustee is responsible for approving the providers that offer this special pre-bankruptcy briefing, and maintains a list of approved providers. 

There are two basic types of Bankruptcy proceedings.  Chapter 7 is called liquidation. It is the most common type of bankruptcy proceeding. Liquidation involves the appointment of a trustee who collects the non-exempt property of the debtor, sells it and distributes the proceeds to the creditors. Bankruptcy proceedings under Chapters 11, 12, and 13 involve the rehabilitation of the debtor to allow him or her to use future earnings to pay off creditors. Under Chapter 7, 12, 13, and some 11 proceedings, a trustee is appointed to supervise the assets of the debtor. 

AUTOMATIC FREEZE: Upon filing an automatic stay takes effect which immediately stops any lawsuit filed against you and most actions against your property by a creditor, collection agency, or government entity. After a bankruptcy a filing, creditors are not typically permitted to  seek to collect their debts outside of the proceeding.

If you are at risk of being evicted, foreclosed on, or having utility services cut, welfare, unemployment benefits, or a host of other reasons, an automatic stay may provide a reason to file for bankruptcy.  It provides a way for the debtor to tell everyone to "leave me alone". The Bankruptcy Court will decide who gets paid. 

A bankruptcy proceeding can either be entered into voluntarily by a debtor or initiated by creditors.  The debtor is not allowed to transfer property that has been declared part of the estate subject to proceedings. Furthermore, certain any  transfers of property prior to the filing (typically 1 year "rollback"), secured interests, and liens may be delayed or invalidated. Various provisions of the Bankruptcy Code also establish the priority of creditors' interests.

Courts determined that assets in Individual Retirement Accounts (IRA’s) are protected under 11 U.S.C § 522(d) and thus exempt from withdrawal from the bankruptcy estate.

Recent passage of the Bankruptcy Prevention and Consumer Protection Act  in April 2005 has also resulted in major reforms in bankruptcy law, outlining revised guidelines governing the dismissal or conversion of Chapter 7 liquidations to Chapter 11 or 13 proceedings. The law also expands the responsibilities of the United States Trustees Program to include supervision of random and targeted audits, certification of entities to provide credit counseling that individuals must receive before filing for bankruptcy, certification of entities that provide financial education to individuals before being discharged from debt, and greater oversight of small business Chapter 11 reorganization cases.

Bankruptcy fraud: Is a business crime of filing for bankruptcy with criminal intent, that is with the intention of evading payment for goods even though the buyer has funds that could be used to pay for them, or accepting payment for goods or services but not supplying them.  Bankruptcy fraud should be distinguished from strategic bankruptcy (Worldcom?), which is not a criminal act (but may prejudice a judge against the filer if there is evidence that bankruptcy is being used strategically). It has been and will be abused. But the laws are tougher today.