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Bankruptcy Proceedings Information
Bankruptcy is federal statutory law (Title 11 of the United
States Code) based upon the Constitutional requirement for "uniform laws on the
subject of Bankruptcy throughout the United States." (Article I, Section 8).
Bankruptcy proceedings are undertaken in the United States Bankruptcy Courts,
part of the District Court system.
There are several types of proceedings that fit under the general category
bankruptcy. The U S Bankruptcy Code has multiple chapters, each describing a
different procedure available for debt resolution. Liquidation under a Chapter 7
filing is the most common form of bankruptcy. 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 under Chapter
11, Chapter 12, or Chapter 13 is more complex and involves allowing the debtor
to use future earnings to pay off creditors. In addition, there is Chapter 9
bankruptcy, available only to municipalities; perhaps the most famous example of
a municipal bankruptcy was in Orange County, California. Chapter 9 is a form of
reorganization, not liquidation. Chapter 12 is somewhat like Chapter 13 but is
only available to farmers in certain situations. As recently as mid-2004 Chapter
12 was scheduled to expire but in late 2004 it was given a renewed lease on
life.
Bankruptcy can be entered into voluntarily by the debtor. It can also be
commenced involuntarily by as few as one creditor if the debt owed is large
enough. An involuntary bankruptcy may be used as a collection tool but its use
can be very risky and, if wielded improperly, may subject the creditor to large
damages.
Some property is exempt from being sold to pay debts in a bankruptcy. The law
varies greatly from state to state. In some states, exempt property includes
equity in a home or car, tools of the trade, and some amount of personal
effects. In other states an asset class such as tools of trade will not be
exempt by virtue of its class except to the extent it is claimed under a more
general exemption for personal property.
One major purpose of bankruptcy is to ensure orderly and reasonable management
of debt. Thus, exemptions for personal effects are thought to prevent punitive
seizures of personal items of little or no economic value (diary, toothbrush,
ordinary clothing), since this does not promote any desirable economic result.
Similarly, tools of the trade may, depending on the available exemptions, be a
permitted exemption as their continued possession allows the insolvent debtor to
move forward into productive work as soon as possible.
Not every debt may be discharged under every chapter of the Code. Certain taxes
owed to Federal, state or local government, government guaranteed student loans,
and support obligations are not dischargeable (but nb., guaranteed student loans
are potentially dischargeable should the debtor prevail in a difficult-to-win
adversary proceeding brought in the nature of a complaint to determine
dischargeability that's brought against the lender; also, the debtor can
petition the court for a "financial hardship" discharge, but it is very rare
that such a discharge is granted). The debtor's liability on a Secured debt,
such as a mortgage or mechanics lien on a home, may be discharged, but the
effects of the mortgage or mechanics lien cannot be discharged in most cases if
it affixed prior to filing, so if the debtor wishes to retain the property, the
debt must usually be paid for as agreed. (See also lien avoidance, reaffirmation
agreement) (Note: there may be additional flexibility available in Chapter 13
for debtors dealing with over secured collateral such as a financed auto, so
long as the over secured property is not the debtor's primary residence.)
Also, any debt tainted by one of a variety of wrongful acts recognized by the
Bankruptcy code, including defalcation, or consumer purchases or cash advances
above a certain amount incurred a short time before filing, cannot be
discharged. However, certain kinds of debt, such as debts incurred by way of
fraud, may be dischargeable through the Chapter 13 super discharge. All in all,
as of 2005, there are 19 general categories of debt that cannot be discharged in
a Chapter 7 bankruptcy, and fewer debts that cannot be discharged under Chapter
13.
For more free legal information on Bankruptcy Laws, please use the
links below:
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