Personal bankruptcy is a fundamental Constitutional right. Article I, Section 8, of the United States Constitution authorizes Congress to enact "uniform Laws on the subject of Bankruptcies" for the benefit of debtors who are United States citizens. Under this grant of authority, Congress enacted today's "Bankruptcy Code," last significantly revised or amended in 2005. The Bankruptcy Code, which is codified as title 11 of the United States Code, is the uniform federal law that governs all bankruptcy cases. Hence, bankruptcy being a fundamental Constitutional right, debtors need a cheap low-cost alternative bankruptcy system to high lawyers fees, and need to be able to afford bankruptcy without lawyers, or with lawyers. The point is that the cost and fees of filing for bankruptcy should never be made to be so high as to be a bar or hindrance for qualified American debtors who need to file for bankruptcy. Could that mean having to file bankruptcy with no bankruptcy attorney - to assure it will be low-low cost bankruptcy? Yes, maybe. Atimes, when the circumstances warrant that to make it practicable for a debtor to be able to excercise or enjoy that fundamental citizenship right.
THE BASIC PROCEDURES OF THE BANKRUPTCY PROCESS
The procedural aspects of the bankruptcy process are governed by the Federal Rules of Bankruptcy Procedure (often called the "Bankruptcy Rules") and the local rules of each bankruptcy court. The Bankruptcy Rules contain a set of official forms for use in bankruptcy cases. The Bankruptcy Code and Bankruptcy Rules (and local rules) set forth the formal legal procedures for dealing with the debt problems of individuals and businesses.
There is a U.S. bankruptcy court for each "judicial district" that has been set up in the country. Each state has one or more districts, and there are 90 bankruptcy districts all across the whole country, with each of the bankruptcy courts generally having its own Clerk's offices.
The court official with decision-making power over federal bankruptcy cases is the United States bankruptcy judge; he or she is the judicial officer who presides over the given United States district court. The bankruptcy judge may decide any matter connected with a bankruptcy case, such as eligibility to file or whether a debtor should receive a discharge of debts. In realistic and practical terms, however, much of the bankruptcy process is really not "judicial" or "legal" or even "financial" at all. But is, rather, merely ADMINISTRATIVE, both in nature and content, and is conducted, in fact, completely away from the bankruptcy courthouse. In deed, in cases dealing with the chapters 7, 12, or 13 types of bankruptcy (meaning largely the personal types of bankruptcy, as opposed to corporate or business types), and sometimes in chapter 11 cases, this administrative process is carried out by someone known as a "trustee" - a person who is not a bankruptcy judge or a court officer, but merely contracted by the court is to process and oversee the case.
Under the bankruptcy process, a debtor's involvement with the bankruptcy judge is usually very limited. If you are a chapter 7 debtor (see below), for example, you typically will not appear in any bankruptcy court or judge's courtroom, nor will you ever see the bankruptcy judge - unless, say, an objection is raised in your case by one of your creditors, an occurrence that is very uncommon. If you are a chapter 13 (see below) debtor, you would only have to appear before the bankruptcy judge at one point, only at a hearing as to the confirmation of your repayment plan. Generally, whether in a chapters 7, 12, or 13 type of case, the only formal proceeding at which a debtor is required appear or be personally present in a case, is what is called "the meeting of creditors." Informally called the "341 meeting" because it is Section 341 of the Bankruptcy Code that mandated it, this meeting is held principally and primarily just so that the debtor's creditors can question the debtor about their debts and property. This meeting is usually held, not in the court house or any judge's chambers, but at usually at the offices of the U.S. trustee.
THE "FRESH START" MISSION AND GOAL OF THE BANKRUPTCY LAW & SYSTEM
Consistent with the original mandate of the U.S. Constitution that bankruptcy is a fundamental constitutional right, probably the single most fundamental goal and mission for which the federal bankruptcy laws are enacted by Congress, is to give debtors a financial "fresh start" from the burden of crushing debts. The U.S. Supreme Court made this point about the purpose of the bankruptcy law in a 1934 decision:
[I]t gives to the honest but unfortunate debtor...a new opportunity in life and a clear field for future effort, unhampered by the pressure and discouragement of preexisting debt. [Local Loan Co. v. Hunt, 292 U.S. 234, 244 (1934)].
For the debtor, this fundamental goal and mission becomes basically accomplished through being granted the bankruptcy discharge by the bankruptcy court, and this releases the debtor from personal liability from specific debts and prohibits creditors from ever taking any action against the debtor to collect those debts.
HOW DO YOU FILE FOR BANKRUPTCY? CAN YOU AFFORD IT?
Before we get to the basic types of bankruptcy that may be open to you under the bankruptcy law, just a few words about this vital issue: HOW DO YOU FILE FOR BANKRUPTCY AFFORDABLY, IF YOU WERE TO WANT TO DO SO? And secondly, as a debtor contemplating it, how can I AFFORD BANKRUPTCY? Actually, under the bankruptcy law, you're given essentially three basic options: either take a do-it-yourself approach and prepare and file the bankruptcy papers (if you know the procedures) yourself; or, if you prefer, hire a knowledgeable bankruptcy attorney (not every attorney necessarily knows squat about bankruptcy!) to file the bankruptcy for you; or, the third option, you may hire a competent Debt Relief Agency or Agent (also called a Bankruptcy Petition Preparer or BPP) to prepare the same bankruptcy papers for you, but at a far lesser and more affordable cost for the bankrptcy filing than the attorney's. Hence, a debtor, should he or she so prefer, may very well have bankruptcy with no bankruptcy attorney. With the help of either a bankruptcy lawyer or a BPP (depending on which one of the methods you prefer to go with), you'll basically need to file a petition with the court that details your creditors and how much you, or if applicable, your business, owes to them. Then, a "trustee" is appointed by the bankruptcy court to oversee your case, and he then is responsible to administer the entire process till you get your court discharge from your debts in a Chapter 7 type of bankruptcy, and/or you repay the debts, say, in a Chapter 13 type of case.
THE BASIC TYPES OF BANKRUPTCY CASES
There are six basic types of bankruptcy cases provided for under the U.S. Bankruptcy Code - Chapters 7, 11, 13, 12, 9, 15. These designations derive from the names of the chapters of the Code that describe them. The following are a brief description of each of these.
CHAPTER 7. This is often called "liquidation" bankruptcy. This type of bankruptcy primarily contemplates an orderly, court-supervised procedure by which a court-appointed "trustee" takes over the assets of the debtor's estate (to the extent that he or she has any, if at all), "liquidates" or reduces them to cash, and makes distributions of such recovered funds to creditors. The debtor is allowed to retain certain "exempt property" that will allow him the bare necessities to enable the debtor to live on even after bankruptcy. In practice, however, there is usually little or no nonexempt property left in most chapter 7 cases, and hence, there is generally NO actual "liquidation" of the debtor's assets in the average case. These cases are called "no-asset cases."
For the most part, in chapter 7 cases, the debtor who is an individual, receives a court discharge that releases him or her from personal liability for certain dischargeable debts. Discharge occurs usually just a few months after the debtor files his or her petition for.
You should note, however, that in 2005, certain amendments which were made to the Bankruptcy Code in 2005, called the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, require the debtor first takes a financial "means test" which is now the basic determinant of whether the individual consumer debtor qualifies to file for relief under chapter 7. If such a debtor's income is exceeds certain income thresholds, the debtor may not be eligible to file for bankruptcy relief under chapter 7.
CHAPTER 13. This is often called the "adjustment of Debts" bankruptcy for an individual with a regular income. This type of bankruptcy is designed for an individual debtor who has a regular source of income. Chapter 13 is usually preferred to chapter 7 by debtors who have some valuable asset that they need to keep, such as a house, because this type of bankruptcy enables the debtor to propose a "plan" to repay creditors their debts over time - usually three to five years. Chapter 13 is also used by consumer debtors who do not qualify for chapter 7 relief because they do not meet the "means test" requirements. Basically, in a Chapter 13 case, the debtor works up a "repayment plan" by which he or she is to repay the debt, in part or in whole. There is then a confirmation hearing held by a judge on the proposed plan; the court then either approves or disapproves the debtor's repayment plan, depending on whether it meets the Bankruptcy Code's requirements for confirmation.
Chapter 13 is very different from chapter 7 in a few ways. The chapter 13 debtor usually remains in possession of the property of the estate and makes payments to creditors, through the trustee, based on the debtor's anticipated income over the life of the plan. Unlike chapter 7, the debtor does not receive an immediate discharge of debts. The debtor must complete the payments required under the plan before the discharge is received. In return, the debtor is protected from lawsuits, garnishments, and other creditor actions while the plan is in effect. The discharge is also somewhat broader (i.e., more debts are eliminated) under chapter 13 than the discharge under chapter 7.
CHAPTER 11. This is often called the "Reorganization" bankruptcy. Ordinarily, it is meant for and primarily used by commercial enterprises that desire to continue operating a business and to repay creditors concurrently, through a court-approved plan of reorganization. The chapter 11 debtor usually has the exclusive right to file a "plan of reorganization" for the first 120 days after it files the case and must provide creditors with a disclosure statement containing information adequate to enable creditors to evaluate the plan. The court ultimately approves (confirms) or disapproves the plan of reorganization. Under the confirmed plan, the debtor can reduce its debts by repaying a portion of its obligations and discharging others. The debtor can also terminate burdensome contracts and leases, recover assets, and rescale its operations in order to return to profitability. Under chapter 11, the debtor normally goes through a period of consolidation and emerges with a reduced debt load and a reorganized business.
CHAPTER 12. This is often called the "Adjustment of Debts" bankruptcy for a Family Farmer or Fisherman with Regular Annual Income. It provides debt relief to family farmers and fishermen with regular income. The process under chapter 12 is very similar to that of chapter 13, under which the debtor proposes a plan to repay a debtor's debts over a period of time - no more than three years unless the court approves a longer period, not exceeding five years. There is also a trustee in every chapter 12 case whose duties are very similar to those of a chapter 13 trustee. The chapter 12 trustee's disbursement of payments to creditors under a confirmed plan parallels the procedure under chapter 13. Chapter 12 allows a family farmer or fisherman to continue to operate the business while the plan is being carried out.
CHAPTER 9. This is Adjustment of Debts of a MUNICIPALITY; it provides essentially for reorganization, much like a reorganization under chapter 11. Only a "municipality" may file under chapter 9, which includes cities and towns, as well as villages, counties, taxing districts, municipal utilities, and school districts.
CHAPTER 15. The purpose of Chapter 15, which is entitled "Ancillary and Other Cross-Border Cases," is to provide an effective mechanism for dealing with cases of cross-border insolvency. This Chapter 15 largely applies where a debtor or its property is subject to the laws of the United States and one or more foreign countries.
Finally, in addition to the above outlined basic types of bankruptcy cases, there is also the SERVICE MEMBERS' CIVIL RELIEF ACT. This is the law and process of bankruptcy filing which, among other things, provides protection to members of the military against the entry of default judgments and gives the court the ability to stay proceedings against military debtors. And there also a liquidation proceedings that comes on under the Securities Investor Protection Act ("SIPA"). True, the Bankruptcy Code provides for a stockbroker liquidation proceeding. However, it is still far more likely that a failing brokerage firm will find itself involved in a SIPA. How? Under the SIPA procedure, investors securities and cash left with failed brokerages are returned to the investors. Since its establishment in 1970 by Congress, the Securities Investor Protection Corporation has protected investors who deposit stocks and bonds with brokerage firms by ensuring that every customer's property is protected, up to $500,000 per customer.
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