The US Constitution (Article 1, Section 8, Clause 4) provides Congress with the authority to enact laws governing bankruptcy effective uniformly for all US citizens regardless of the state of their residence. Congress has exercised that authority at various times since 1801.
The essential purpose of bankruptcy law is to stop creditors’ actions while the petitioning debtor deals with their debt under the supervision of the Court.
Most debtors will seek protection under Chapter 7, Chapter 13, or Chapter 11 of the Bankruptcy Code.
Chapter 7 bankruptcy is a liquidation procedure that is a total fresh start. Chapters 11 and 13 are procedures for reorganizing assets and liabilities without a complete liquidation.
Chapter 7 bankruptcy is the most common form. A trustee is appointed to oversee the liquidation of the debtor’s assets to pay off their creditors. At the close of a Chapter 7 case, the debtor is discharged from personal liability for his or her debts.
Most petitioning debtors will be insolvent. That is, the total amount of their debt exceeds the total value of their assets. Creditors have different priorities as to who gets paid first.
Both federal bankruptcy laws and state laws provide exemptions for classes of assets from the claims of creditors. A debtor in bankruptcy has the choice of which exemptions to invoke.
The categories of exemptions include a personal residence, limited number of vehicles, limited amount of personal property and household goods.
Secured creditors have a priority position when it comes to dividing up non-exempt assets. Also, while the debtor is discharged from personal liability liens on particular assets can survive. For example, a bankruptcy does not expunge a deed of trust (mortgage) lien on a personal residence.
Some Chapter 7 cases are simpler than others. However, all Chapter 7 cases require the services of an experienced bankruptcy attorney or bankruptcy lawyer.
Chapter 13 bankruptcy is sometimes called a wage earner’s reorganization plan. If you have a steady regular income, you can petition the Court to stay any creditor’s collection efforts while you work out a plan to pay off creditors over time. Usually, the allowed time for installment payments is 3 to 5 years.
The Court and the appointed Trustee must approve of the plan. If approved, the creditors must accept it. However, they can object based on rules for the Court’s confirmation of the plan, including feasibility, good faith, and other parameters. The Trustee’s job is to protect the interests of all creditors.
A Chapter 11 reorganization is the most complex. It is rare for individuals to file for Chapter 11 reorganizations. It is generally limited to businesses with very complex properties and operations as well as complicated debt structures.
Like a Chapter 13 bankruptcy, the Chapter 11 debtor files a reorganization plan with the Court and is reviewed by an appointed Trustee. The Plan must satisfy many requirements including feasibility and good faith. Formulation of a Chapter 11 Plan will require the services of a seasoned bankruptcy lawyer as well as accountants.
Creditor priorities in a Chapter 11 case are the same as in the other bankruptcy chapters. That is, administrative expenses are paid first. These include expenses necessary to preserve the bankruptcy estate including operating expenses and employee wages.
Secured creditors are next in line. Unsecured creditors come last, and they are prioritized by certain categories. For example, claims of employees or suppliers have priority over other unsecured creditors.
The Law Offices of John E. Mufson have more than 35 years of experience as bankruptcy attorneys with debtor litigation against creditors, including all chapters of bankruptcy petitions. If you find yourself overwhelmed by debt and collection harassment, and you need a fresh start please contact us in Del Ray Beach, Florida.