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Basics of Bankruptcy Law

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by , 10-08-2011 at 09:47 PM (1135 Views)
What law governs bankruptcy?

In general, Federal Law governs bankruptcy. Bankruptcy is covered in Title 11 of the United States Code.

Title 11 of the United States Code, the Bankruptcy Code, governs the various bankruptcy processes. In addition to Title 11, Congress passed the Bankruptcy Abuse Prevention and Consumer Protection Act (“BAPCPA”) in 2005. The most significant change under BAPCPA is the “means test.” Under the means test, the state compares a debtor’s income to the median income of the debtor’s state. A debtor who has an income above the median income of the state is subject to the means test. Conversely, a debtor who has an income below the median income is not subject to the means test. The means test finds abuse if the debtor’s monthly disposable income is higher than a specified floor amount or portion of their debts. A debtor may only rebut a presumption of abuse under “special circumstances.”

What is the effect of filing a bankruptcy petition in Dallas?

When a bankruptcy petition is filed, a trustee is assigned to the case. The debtor is required to file certain documentation with the petition and the debtor cannot transfer assets. Any misconduct shortly before or during the bankruptcy process will result in a denial of discharge. After the filing of the petition, creditors and other third parties are given the opportunity to object to the liquidation or reorganization of the debtor’s debts.

The filing of a bankruptcy petition is a unique legal proceeding because it automatically creates a legal stay. This means that any creditor listed in the documentation filed with the petition can no longer take any action in furtherance of collecting the debt owed. The purpose of the stay is to give debtors temporary relief and give them an opportunity to decide how to deal with their debts and the bankruptcy.

The trustee will organize a meeting of the creditors and at this meeting the trustee and the creditors will have an opportunity to ask the debtor about his or her financial situation. Next the court will hold a hearing where the creditors can voice an objection to discharge or reorganization of the debt and the court will make a determination about whether it is proper to discharge or reorganize the debts. Once the debts are discharged, the debtor is no longer personally liable on the debts owed to creditors. After a discharge, secured creditors are still able to seize any collateral put forth on the debts. If the debtor wishes to keep a secured piece of property, the debtor may choose to reaffirm a debt. This means that the debtor will remain liable to that creditor and will be able to keep the property. A reaffirmation is an agreement between the debtor and creditor.


What types of bankruptcies are there?

There are four types of bankruptcy, named for the four chapters in the US Bankruptcy Code:

Chapter 7 bankruptcy is known as liquidation bankruptcy because all of the debtor's non-exempt property is sold to pay off creditors. Chapter 7 essentially wipes a debtor's financial slate clean even if the debtor's current assets cannot pay off all debts. It is an effective for individuals or businesses who need relief from debt they will not be able to pay off but it is intended to be used on a limited basis.

Chapter 11 bankruptcy is for business debtors. The debtor continues to operate and maintain all assets while reorganizing their business to pay off debts owed to creditors. This is the most complex form of bankruptcy, as it involves a number of negotiations and lawsuits to determine how assets should be distributed.

Chapter 12 and 13 bankruptcy are similar to Chapter 11 bankruptcy in that the debtor maintains all assets while carrying out an approved repayment plan. Chapter 12 bankruptcy is for debtors who qualify as "family farmers" or "family fishermen" while Chapter 13 is for individuals. Chapters 11, 12, and 13 have complex but important distinguishing aspects outside of their differences in eligibility.

Bankruptcy can be voluntary or involuntary, the difference being who files the bankruptcy petition:
  • Voluntary is most common, it is where the debtor files a petition for bankruptcy.
  • Involuntary bankruptcy is when the creditor files a bankruptcy petition to force a debtor into bankruptcy. Involuntary bankruptcy is only available for Chapters 7 and 11 bankruptcy.
Benefits of filing for bankruptcy:
Bankruptcy provides debtors relief from creditors. In both Chapter 7 and 13 bankruptcy, an automatic stay prevents collection actions from most, if not all creditors. At the end of the process, debtors are discharged from most, if not all debts.

Stopping collection efforts and the automatic stay:
An individual is provided automatic protection from collection actions as soon as they file for bankruptcy through the automatic stay. The automatic stay prevents creditors from filing lawsuits, garnishing wages and making demanding telephone calls for debts the debtor owes to the creditor. The bankruptcy clerk notifies all creditors who the debtor includes when filing that the debtor has an automatic stay. However, the automatic stay does not apply to certain debts listed in the Bankruptcy Code and may be lifted for other debts. For example, filing for bankruptcy does not prevent eviction actions, legal actions for child support, or divorce proceedings. Individuals who file under Chapter 13 get more protection than Chapter 7 filers.


Benefits of filing for bankruptcy:
Bankruptcy provides debtors relief from creditors. In both Chapter 7 and 13 bankruptcy, an automatic stay prevents collection actions from most, if not all creditors. At the end of the process, debtors are discharged from most, if not all debts.

Stopping collection efforts and the automatic stay:
An individual is provided automatic protection from collection actions as soon as they file for bankruptcy through the automatic stay. The automatic stay prevents creditors from filing lawsuits, garnishing wages and making demanding telephone calls for debts the debtor owes to the creditor. The bankruptcy clerk notifies all creditors who the debtor includes when filing that the debtor has an automatic stay. However, the automatic stay does not apply to certain debts listed in the Bankruptcy Code and may be lifted for other debts. For example, filing for bankruptcy does not prevent eviction actions, legal actions for child support, or divorce proceedings. Individuals who file under Chapter 13 get more protection than Chapter 7 filers.
Common bankruptcy exemptions:
Home furnishings and goods are exempt under federal law up to $11,525, with no one item exceeding $550 (and state laws have their own exemption limit). It should also be noted that trustees often do not bother selling these items because they do not hold great value.
Retirement funds are exempt. This includes in most states and federally: Individual Retirement Accounts (IRA), deferred compensation such as 401K, and profit and stock sharing plans. The cap is set at $1,171,650 on retirement fund exemption protection.

Explain the bankruptcy process
Bankruptcy is a legal process governed by the rules and procedures in the Bankruptcy Code and Bankruptcy Rules. In short, bankruptcy gives a debtor a fresh start by providing ways for debts to be paid, restructured, or eliminated. Bankruptcy involves two main parties, the debtor and the creditor. The debtor is the party who owes money to the creditor. The creditor is the entity to whom the money, goods, or services are owed.

A typical bankruptcy case begins with the debtor paying filing fees and filing a petition with the bankruptcy court in the jurisdiction where the debtor resides. Also, debtors must attend an approved credit counseling course with an approved nonprofit agency within 180 days before filing the petition. The debtor must submit financial information to the court, including a list of assets, debts and creditors. In cases where the court appoints a bankruptcy trustee to administer the case, the debtor must provide his/her most recent federal tax return. When a bankruptcy petition is filed, the debtor’s creditors are notified of the filing and an automatic stay is implemented. This prevents creditors from going after the debtor in collection. Depending on the type of filing, the debtor receives a discharge of his/her debts after a certain time period.

Financial Management Course

The financial management course is the final step that debtors must take before receiving a discharge order. All individual debtors in a chapter 7 case are required to take a financial management course and file a Certificate of Completion with the court within 45 days after the date set for the meeting of creditors. Failure to complete this course may result in dismissal of your case without a discharge. The financial management course is offered in person, by telephone, and online.

The debtor may file a Motion for Exemption from Financial Management Course under one of three conditions:
  1. The debtor is unable to complete the course due to incapacity or disability.
  2. The debtor is on active military duty or in an active combat zone.
  3. There are inadequate Financial Management services in the district, as determined by the US Trustee.
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