What is Bankruptcy?
September 20, 2010
Bankruptcy is the outcome of an individual or organization running out of funds, and being unable to make payments for products and services purchased. It is a “legally declared inability” to pay creditors and is often sought by creditors against a business or organization in an attempt to recover some or most of what is owed to them. Thus the debtor or the creditors can file for bankruptcy.
This leads to an evaluation of all the assets of the debtor and using them to repay all or part of his outstanding debts. The debtor then is allowed to start a fresh and his old debts are forgiven, but it affects his home, his credit rating, his business, and his life can never be the same since he will carry the stigma attached with bankruptcy for a long time.
Bankruptcy is permitted under the United States Constitution and every district of the country has special bankruptcy courts to resolve cases. An individual, a firm or a partnership can file for a bankruptcy in court, or less frequently, creditors can petition the court to declare the business bankrupt so that their assets can be used to settle creditor claims. The court then appoints a trustee, that is, an individual who is either an officer of the bankruptcy court called the Official Receiver, or an insolvency practitioner who is an authorized debt specialist. It is the job of the trustee to gather information about the debtor’s financial situation and protect his assets so that they may be used for paying off creditors.
Impact of bankruptcy on debtor
◦Closure of the business due to lack of funds
◦Dismissal of employees
◦Loss of job for the debtor
◦Debtor can no longer make direct payments
◦Forfeit all assets
◦Spare income from other sources used to settle creditor claims
◦Loss of financial interest in home property
◦Credit rating affected
◦Difficult to raise funds since bankruptcy records are maintained for 6 years
Types of bankruptcy
The United States Bankruptcy Code lists four types of bankruptcy. The debtor has to decide on the type of bankruptcy he can file for, on the basis of ownership of the business, whether it is sole proprietorship or a partnership.
1. Chapter 7 bankruptcy is a liquidation bankruptcy which most people file for. This stipulates that the appointed trustee will sell all the non-exempt assets of the debtor and use the funds received from the sale to settle the maximum number of debts. The debt that cannot be repaid is discharged. Chapter 7 bankruptcy is available for individuals and companies. Business cannot continue once bankruptcy has been filed and income generated after filing goes to the debtor and cannot be used to settle claims.
2. Chapter 11 bankruptcy is filed by most businesses and is very complicated. The debtor continues his operations, retains ownership of all his assets but has to work out a reorganization plan for settling the dues of all his creditors. Previously, the business could take any amount of time to chart a reorganization plan, but with the implementation of the Bankruptcy Abuse Prevention and Consumer Protection Act 2005, a 120-day limit has been set to finalize the plan.
3. Chapter 12 bankruptcy applies to farm owners who retain their assets and have to formulate a repayment plan to settle dues.
4. Chapter 13 bankruptcy is similar to chapter 11 but applicable to individuals who retain their asset ownership and have to work out a 3-5 year repayment plan. Some limits are imposed on the debt involved and some debts are discharged.
Thinking about Filing Bankruptcy?
Filing bankruptcy is perhaps the most difficult decision you'll ever make! I'm sure you have many questions about filing bankruptcy. Questions like, "Am I qualified to file bankruptcy" , "How hard is it to file on my own bankruptcy", "How much does it cost" and the most important question of all; "Can I file my own bankruptcy without an attorney?" Get answers to these questions using this FREE "Do it Yourself" Bankruptcy Site to see if filing bankruptcy is the right solution for solving your personal debt problems.
Under the rules enacted in 2005, the first step in figuring out whether you can file for Chapter 7 bankruptcy is to measure your "current monthly income" against the median income for a household of your size in your state. If your income is less than or equal to the median, you can file for Chapter 7 bankruptcy. If it is more than the median, however, you must pass "the means test" -- another requirement of the new law -- in order to file for Chapter 7.
The Means Test
The purpose of the means test is to figure out whether you have enough disposable income, after subtracting certain allowed expenses and required debt payments, to make payments on a Chapter 13 plan. To find out whether you pass the means test, you subtract certain allowed expenses and debt payments from your current monthly income. If the income that's left over after these calculations is below a certain amount, you can file for Chapter 7. If you're looking for an easy way to determine your eligibility under the means test, use the online means test calculator, created by the applicable income and expense standards for your state, county, and region to determine your eligibility.
Are You Eligible for Chapter 7?
Despite what you may have heard about recent changes in bankruptcy law, most people who need bankruptcy protection are still eligible.
Are you?
This "Means Testing Calculator" will help you find out.
IMPORTANT:The Census Bureau’s Median Family Income Data and Administrative Expense Multipliers accessible through the "Means Testing Information" page have been updated. The U.S. Trustee Program will apply the updated data to all cases filed on or after March 15, 2010.
Credit Counseling
IMPORTANT: A change to the bankruptcy law, effective October 17, 2005, requires credit counseling from a government approved organization sometime within the six month period before filing for Chapter 7 Bankruptcy or Chapter 13 Bankruptcy.
Before you can file for bankruptcy under either Chapter 7 or Chapter 13, you must complete credit counseling with an agency approved by the United States Trustee's office. (To find an approved agency in your area, go to the Trustee's website, click "Credit Counseling and Debtor Education".) The purpose of this counseling is to give you an idea of whether you really need to file for bankruptcy or whether an informal repayment plan would get you back on your economic feet.
Counseling is required even if it's obvious that a repayment plan isn't feasible or you are facing debts that you find unfair and don't want to pay. You are required only to participate, not to go along with any repayment plan the agency proposes. However, if the agency does come up with a repayment plan, you will have to submit it to the court, along with a certificate showing that you completed the counseling, before you can file for bankruptcy.
Although there is a wealth of FREE information that will answer most of your questions, let me be perfectly clear here; filing bankruptcy should be your last resort! You always have the option to file yourself or hire an attorney. BEFORE deciding you should arm yourself with as much information as possible. You especially need to know the difference between Chapter 7 and 13 because they offer very different forms of protection. I highly recommend consulting a bankruptcy attorney before deciding what to do!
Bankruptcy Courts & Filing Bankruptcy
Each of the 94 federal judicial districts handles bankruptcy matters, and in almost all districts, bankruptcy cases are filed in the bankruptcy court. Bankruptcy cases cannot be filed in state court. Bankruptcy laws help people who can no longer pay their creditors get a fresh start by liquidating their assets to pay their debts, or by creating a repayment plan.
Bankruptcy laws also protect troubled businesses and provide for orderly distributions to business creditors through reorganization or liquidation. 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.
Bankruptcy Forms & Filing Bankruptcy
"Official Bankruptcy Forms must be used to file and take action in bankruptcy cases. Procedural Forms also may be necessary for use during the course of some bankruptcy proceedings."
The Official Bankruptcy Forms are posted to publicize the content and format of the forms and may be used by the public in bankruptcy cases.
Instructions for some of the Official Bankruptcy Forms are unavailable because they are under revision. The revised Instructions will be posted here as they are available.
Fillable forms. To enhance usability, some of the forms can be filled in electronically. After completion, such "fillable forms" should be printed and filed by using the "print" button at the bottom of the form. If additional space is needed to complete a field in a fillable form, use a separate sheet of paper and include the case name, case number (if known), and a description or the number of the field being continued.
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