Personal Bankruptcy Basics – Chapter 7 & Chapter 13

Bankruptcy is one of the most misunderstood legal protections in today’s society. Bankruptcy is often given a negative connation. However, a fundamental understanding of bankruptcy, both Chapter 7 and Chapter 13, and its general concepts disposes of the negativity associated with filing for bankruptcy protection. While both corporations and individuals may file for bankruptcy protection, this article addresses personal bankruptcy.

What is Personal Bankruptcy and What Alternatives are Available to the Personal Debtor?

A voluntary personal bankruptcy is a proceeding a debtor initiates seeking relief provided by federal statute – the U.S. Bankruptcy Code. 11 U.S.C. §101, et seq. Federal Courts have exclusive jurisdiction over bankruptcy proceedings, which are usually initiated in the federal court district in which the debtor resides.

 Chapter 7 Bankruptcy Basics

Generally, two types of relief are available for individuals in bankruptcy. The optimal bankruptcy is liquidation under Chapter 7. 11 U.S.C. §701, et seq. A Chapter 7 bankruptcy proceeding and relief are available to individuals who pass a “means test,” which requires the debtor to complete a detailed income and budget form. In a Chapter 7, all of the debtor’s non-exempt assets are collected by the bankruptcy trustee pursuant to the Bankruptcy Code and sold to pay creditors. The debtor’s assets include any legal or equitable interest the debtor has in real and personal property. At the conclusion of the bankruptcy case all the debtor’s debts are discharged. The discharge absolves the debtor from any responsibility to pay debts listed in the bankruptcy petition.

 Chapter 13 Bankruptcy Basics

Another type of relief for debtors under the Bankruptcy Code who have a regular source of income is reorganization under Chapter 13. 11 U.S.C. §1301, et seq. In a Chapter 13 bankruptcy, sometimes called a wage earner reorganization, the debtor proposes a plan for repayment of some or all debts under the Bankruptcy Code. The plan, if approved, is carried out under supervision of the bankruptcy court. The debtor retains possession of all of his or her assets, and all of the debtor’s property is protected from claims of creditors in a Chapter 13. As in a Chapter 7, a debtor is absolved from personal liability for debts listed in the bankruptcy petition. The listing, or scheduling, of debts in the bankruptcy petition is critically important, as debts owed to and claims of creditors that are not scheduled in the petition are not discharged and not subject to the automatic stay, which is explained below..

Automatic Stay in Bankruptcy

Upon the filing of a bankruptcy petition under either Chapter 7 or Chapter 13, the automatic stay provisions of the Bankruptcy Code (11 U.S.C. §362(a)) prevent creditors, with certain limited exceptions (such as alimony, maintenance and support), from initiating or continuing legal actions or other collection efforts from the debtor.  Common examples of collection activities that are stayed are car repossessions, salary and wage garnishments, mortgage foreclosures, and tax levies. Therefore, the debtor receives protection from creditor collection efforts effective immediately upon filing the petition in bankruptcy, a significant benefit. Most courts have ruled that any creditor actions in violation of the automatic stay are void, or at least voidable.

Why File for Bankruptcy Protection?

The two most noted purposes of bankruptcy are a fresh start for the debtor and equity among creditors with the former purpose being far more significant. The fresh start concept is the statutory goal of the Bankruptcy Code. It is designed to allow individuals consumed by debt to free themselves of the debt burden, allowing them to embark on a productive life free of past financial difficulties. The goal is to free the individual from the permanent disability that would prevent him or her from becoming a productive member of society. The Supreme Court has described the fresh start concept as a “new opportunity in life, unhampered by the pressure and discouragement of preexisting debt.”  Local Loan Co. v. Hunt, 292 U.S. 234, 244 54 S. Ct. 695, 78 L. Ed. 1230 (1934).

Bankruptcy or Other Debt Issues?

The Kepple Law Group is highly knowledgeable in bankruptcy matters, including the discharge of debts, and can advise clients in all aspects of bankruptcy proceedings.

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