Understanding Bankruptcy to Handle the Process Better

The term Bankruptcy means the legally declared inability of an individual or an organization to pay their credits. Involuntary bankruptcy is the situation in which the creditor may file a bankruptcy petition against a debtor to recover a portion of the amount dues him. Generally in a majority of cases, bankruptcy is initiated by the debtor known as “voluntary bankruptcy”. Bankruptcy in the United States is placed under ‘Federal jurisdiction” by the United States Constitution that enacts “uniform laws on the subject of bankruptcies throughout the United States’.

Bankruptcy cases are always filed in the U.S.bankruptcy court-an adjunct to U.S. District court. Bankruptcy cases with respect to validity of claims and exemptions are highly dependent upon State laws and therefore in many bankruptcy cases, it is often impossible to generalize bankruptcy laws across state lines.

There are six types of bankruptcy under Bankruptcy Code of the U.S code.

Chapter 7: Basic liquidation for individuals and business.
Chapter 9: Municipal bankruptcy.
Chapter 11: Rehabilitation by business debtors and also by individuals with extensive debts and assets.
Chapter 12: Rehabilitation for family farmers and fishermen.
Chapter 13: Rehabilitation for individuals with a regular source of income.
Chapter 15: Ancillary and other international cases.

The most common types of personal bankruptcy for individuals are chapter 7 and chapter 13. In chapter 7, a debtor surrenders his or her non-exempt property to a bankruptcy trustee who liquidates the property and distributes the proceeds to the debtor’s creditors. In exchange for this, the debtor is entitled to a discharge from debt unless the debtor is not guilty of certain types of inappropriate behavior like hiding records concerning financial conditions. Many individuals who are bankrupt own only exempt property. The exempt amount varies from state to state. Chapter 7 relief is available only once in any 8 year period.

In chapter 13, the debtor retains ownership and possession of all his or her assets but must devote a part of his or her future income to creditors over a period of 3 to 5 years. The amount and period vary depending upon the value of debtor’s property and the amount of debtor’s income and expenses. Secured creditors are entitled to greater payment than unsecured creditors.

There are many types of proceedings that fit under bankruptcy. Chapter 7 liquidation involves the appointment of a trustee who collects the nonexempt properties of the debtor, sells them and distributes the ties proceeds to the creditors.

Chapter 9 is a form of bankruptcy available only to municipalities.

Chapter 11 involves allowing the debtor to keep a portion of his or her property and use the future earnings to pay off creditors.

Chapter 12 is similar to chapter 13 but available only to family farmers and family fishermen in certain situations.

Chapter 15 deals with foreign companies with U.S.debts.

Bankruptcy crimes: Bankruptcy fraud is filing a bankruptcy petition in a bankruptcy case to attempt to execute or conceal a scheme or pretense to defraud. Bankruptcy fraud also means making fraudulent representation claim or response in connection with a bankruptcy case. Bankruptcy fraud is punishable by a fine or by up to 5-year imprisonment or both. Bankruptcy crimes are prosecuted by the United States attorney after a reference from the U.S trustee.

Banks and other deposit institutions, insurance companies, railroads and certain other financial institutions regulated by the federal and state governments cannot be a debtor under the bankruptcy code. Instead, special state and federal laws govern the liquidation of these companies. It is erroneous to refer to a bank or insurer as being “bankrupt’. “Insolvent”, “in liquidation” or “in receivership” would be fitting under some circumstances in the U.S context at least.