A summary of the basics of bankruptcy law in the US, particularly Chapter 7 and Chapter 13 personal bankruptcy.
Few of us are unfamiliar with the term bankruptcy. In fact, just last year more than 1 million bankruptcy filings were made in the United States, according to US courts statistics. The vast majority of these were personal, rather than corporate in nature. But what exactly is bankruptcy and how does the process work?
As it is understood in this country, bankruptcy is more or less synonymous with financial insolvency, or the inability to pay one’s debts. Here and elsewhere around the world, the term also refers to the legal status of a debtor (either a person or a business) who is no longer capable of paying off his, her or its creditors. In most cases, the debtor chooses to initiate a bankruptcy. But, under some circumstances legal proceedings may be undertaken by a creditor who wishes to recoup money from an insolvent debtor.
In the US, bankruptcy is always a federal matter. In fact, the process is mentioned in Article I, Section 8, Clause 4 of the Constitution, which gives Congress the power to “establish uniform Laws on the subject of Bankruptcies.” Today, each case is handled by one of the United States bankruptcy courts, which are part of the federal system of US district courts.
The details of the federal Bankruptcy Code define six types of bankruptcy proceedings, each designated by a corresponding chapter of the code.
Chapter 7 is the most common form of personal bankruptcy in the US. Chapter 7 involves selling off, or liquidating, most of the debtor’s assets (with some exceptions) in order to pay creditors with the money raised. At the end of the process, most of the filer's remaining debts (with some exceptions) are discharged.
Chapter 13, based on the idea of reorganizing personal debt, is the second most common form of personal bankruptcy. Under Chapter 13, the federal bankruptcy court approves and oversees a financial reorganization plan that allows the debtor to repay creditors over a period of between 3 and 5 years, in most cases.
Other types of bankruptcy include: Chapter 9 for municipalities, Chapter 11 for corporations, Chapter 12 for family-run farming or fishing businesses, and Chapter 15 for bankruptcies involving foreign debts and/or international jurisdictions.
When an insolvent individual enters either Chapter 7 or Chapter 13 bankruptcy, he or she is generally granted an “automatic stay,” a temporary suspension of any judgments or actions taken by creditors seeking to recoup debts from that person. Once the bankruptcy process has been completed, this stay is typically lifted.
All bankruptcies are, of course, unique in their own ways. But, examination of a few specific bankruptcy cases can be illustrative of the many types of situations and judgments that might arise during the process.
A recent example from the Colorado bankruptcy courts is In re Fogel, Case No. 10-38010 ABC, Docket #58, (Bankr. D. Colo. April 1, 2014); Fed.R.Bankr.P. 1016. In this case, a debtor was granted Chapter 13 bankruptcy protection on January 25, 2011 but died just a month later. The debtor’s widow, who was not listed as a co-debtor but was the personal representative of his estate, filed through her lawyer some three years later to receive the benefits of her late husband’s bankruptcy discharge. Her request was denied. The judge in this case determined that the widow could not simply continue to make the agreed upon payments of her deceased husband’s bankruptcy plan without making her own bankruptcy claim.
Another case, In re John Gazzo (Gasso v. Ruff and Merrick), Bankruptcy Case No. 12-33683-SBB, Adversary Proceeding No. 13-01356-SBB, illustrates some of the intricacies and legal power of the automatic stay granted to a debtor in bankruptcy. In this situation, the debtor/plaintiff attempted to halt the defendants (his former spouse and her attorney) from initiating divorce-related proceedings in domestic court while he was protected by a Chapter 7 bankruptcy automatic stay. The defendants argued that theirs was a criminal contempt of court hearing, and therefore not subject to the automatic stay. The judge in this case dismissed the defendants’ motion, finding nothing criminal in the domestic case. Instead, he ordered that the automatic stay did apply and that the debtor/plaintiff was protected by bankruptcy law from any efforts by his ex-wife to obtain financial damages in her divorce case. Moreover, the judge pointed out that the defendant’s claims had amounted to “willful violations of the automatic stay.” Thus, the judge encouraged the debtor to apply for punitive damage, fees, and attorney’s costs against his ex-wife.
These examples demonstrate just two of the countless eventualities that can arise over the course of a bankruptcy case. And, while financial insolvency is hardly a state anyone would wish upon themselves, the rules of the Bankruptcy Code are designed to protect the rights of the debtor as he or she works back toward financial security.
Please note that Pippenger Hedberg Law handles both Chapter 7 and Chapter 13 bankruptcy proceedings on behalf of clients. Feel free to contact our offices if you have any questions..