Bankruptcy is a legal proceeding involving a person or business that is unable to repay outstanding debts. The 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.
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. In theory, the ability to file can benefit an overall economy by giving persons and businesses a second chance to gain access to consumer credit and by providing creditors with a measure of debt repayment. Upon the successful completion of bankruptcy proceedings, the debtor is relieved of the debt obligations incurred prior to filing for bankruptcy.
Filings in the United States fall under one of several chapters of the Bankruptcy Code:
– Chapter 7, which involves liquidation of assets.
– Chapter 11, which deals with company or individual reorganizations.
– Chapter 13, which is debt repayment with lowered debt covenants or payment plans.
Filing specifications vary among states, leading to higher and lower filing fees depending on how easily a person or company can complete the process
Individuals or businesses with few or no assets file Chapter 7. The chapter allows individuals to dispose of their unsecured debts, such as credit cards and medical bills. Individuals with nonexempt assets, such as family heirlooms; collections with high valuations, such as coin or stamp collections; second homes and vehicles; and cash, stocks or bonds, must liquidate the property to repay some or all of their unsecured debts. Consumers who have no valuable assets and only exempt property, such as household goods, clothing, tools for their trades and a personal vehicle up to a certain value, repay no part of their unsecured debt.
Businesses often file Chapter 11, the goal of which is to reorganize and once again become profitable. Filing Chapter 11 allows a company to create plans for profitability, cut costs and find new ways to increase revenue. For example, a housekeeping business filing Chapter 11 might increase its rates slightly and offer more services to become profitable. Chapter 11 allows a business to continue conducting its daily operations without interruption, while working on a debt repayment plan under the court’s supervision. In rare cases, individuals file Chapter 11.
Individuals who make too much money to qualify for Chapter 7 may file under Chapter 13. This chapter allows individuals and businesses to create workable debt repayment plans. In exchange for repaying their creditors, the courts allow these debtors to keep all of their property including nonexempt property.
Bankruptcy courts are specialized, federal courtrooms created to settle all types of both personal and corporate bankruptcy cases. Unlike the federal court, which was established by the US Constitution, the bankruptcy court system was established by an act of congress in 1978 as part of the Bankruptcy Reform Act.
A bankruptcy trustee is a person appointed by the United States Trustee, an officer of the Department of Justice, to represent the debtor’s estate in a bankruptcy proceeding. Although a bankruptcy judge has the ultimate authority on the distribution of assets, the trustee is charged with evaluating and making recommendations about various debtor demands in accordance with the U.S. Bankruptcy Code.
The responsibilities of the trustee are different in a Chapter 7 bankruptcy proceeding (which is essentially a liquidation) than in a Chapter 11 proceeding, wherein the debtor hopes to emerge from the bankruptcy as a going concern. In a Chapter 7 proceeding, the trustee will manage the asset sales and then distribute the proceeds to creditors.
Bankruptcy fraud is a white-collar crime. While difficult to generalize across jurisdictions, common criminal acts under bankruptcy statutes typically involve concealment of assets, concealment or destruction of documents, conflicts of interest, fraudulent claims, false statements or declarations, and fee fixing or redistribution arrangements. Falsifications on bankruptcy forms often constitute perjury. Multiple filings are not in and of themselves criminal, but they may violate provisions of bankruptcy law. Bankruptcy fraud is a federal crime in the United States.
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