Bankruptcy and the Legal System

Bankruptcy and the Legal System

Simply stated, bankruptcy is a legal procedure that allows you to get out of oppressive debt and get a fresh start financially. In the United States, the importance of bankruptcy was recognized at the time of our nation's birth and was made a part of the U.S. Constitution.

Article I, Section 8 of the U.S. Constitution gives Congress the power to establish "uniform laws on the subject of bankruptcies throughout the United States." In 1800, Congress enacted the first bankruptcy laws.

Today, there exists a comprehensive set of federal laws that govern bankruptcy. There are so many bankruptcies filed each year that there is a special division of the federal court system devoted exclusively to bankruptcy. If you need to file for bankruptcy, you can be sure you will not be alone.

Purpose and Procedure

The bankruptcy procedure serves two purposes. First, it allows you to change your financial situation. Second, it holds your creditors at bay while you make this change.

Depending on your financial situation, you can choose from one of two bankruptcy procedures. The first is traditional bankruptcy, in which most debts are forgiven. The other procedure is commonly referred to by a few different names, such as reorganization, a wage­ earner plan, or a repayment plan. In this procedure, you would arrange to repay some or all of your debts according to a payment plan.

Chapters of Bankruptcy Rules

Traditional bankruptcy is covered in Chapter 7 of the federal Bankruptcy Code, and is often referred to as a Chapter 7. The payment plan procedure is covered in Chapter 13 of the Bankruptcy Code, and is referred to as a Chapter 13.

There are other chapters to the Bankruptcy Code. Chapter 12 is specifically designed for farmers. Chapter 11 is generally designed for corporations and partnerships. Chapter 11 is also available to individuals, although it is generally not applicable unless the person has significant secured and unsecured debts and sufficient income to pay off a portion of these debts over several years.

Bankruptcy Reform

Congress changed the bankruptcy laws significantly in 2005, making it more difficult for individuals to file for bankruptcy. However, bankruptcy relief remains available to those who qualify. Some important elements to the revised bankruptcy laws are:

  • A credit counseling class is required before someone can file for bankruptcy and a financial management class is required after the filing.
  • Individuals with higher income must file under chapter 13
  • The courts scrutinize bankruptcy filings more closely and require additional documentation
  • Lawyers are harder to find and more expensive
  • Credit and financial budget counseling is required
  • Property must be valued at replacement cost, instead of a "fire sale" cost
  • A particular state's exemptions may not available to recent residents (although those residents may be able to use their prior state's exemptions).

Bankruptcy law has changed a lot since 2005, but you can still take advantage of the laws to absolve some debts.