Different Types of Bankruptcies in America and the Bankruptcy Abuse Prevention and Consumer Protection Act
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The recent economic downturn put many in a difficult financial position, unable to repay all of their obligations. This has been true for not just individuals, but businesses and cities, as well. When this occurs, the law provides a mechanism for getting out of control debts back under control, either by restructuring debt or wiping out certain types of obligations. This is bankruptcy.
Bankruptcy in the United States is a matter placed under federal jurisdiction by Article 1, Section 8, Clause 4 of the United States Constitution. This provision allows Congress to enact "uniform laws on the subject of bankruptcies throughout the United States". As a result, Congress has enacted statutes governing bankruptcy, primarily in the form of the Bankruptcy Code (Title 11 of the United States Code).
Individual states are also empowered to enact local variations on the bankruptcy laws. While bankruptcy cases are always filed in United States Bankruptcy Court (a federal court), bankruptcy cases are often dependent, at least in part, on state laws, such as laws relating to exemptions.
Generally, a debtor declares bankruptcy to obtain relief from debt, and this is accomplished either through a discharge of the debt or through a restructuring of the debt. Which approach is taken depends on the chapter of the bankruptcy code relied upon and the circumstances of the debtor and its obligations. There are six types of bankruptcy under the Bankruptcy Code:
Chapter 7: basic liquidation for individuals and businesses; also known as straight bankruptcy. It is the type of bankruptcy in which assets are forfeited in an attempt to satisfy as much of the existing obligations of the debtor as possible, with remaining debts discharged (or “wiped out”), subject to a number of exceptions.
Chapter 9: municipal bankruptcy; this is a federal mechanism for the resolution of municipal debts.
Chapter 11: rehabilitation or reorganization, this form of bankruptcy allows one to retain their assets but restructure the debt obligations to make repayment easier. Often used by business debtors as a form of corporate financial restructuring which typically allows companies to continue to function while they follow debt repayment plans.
Chapter 12: rehabilitation for family farmers and fishermen.
Chapter 13: rehabilitation with a payment plan for individuals with a regular source of income; enables individuals with regular income to develop a plan to repay all or part of their debts; also known as Wage Earner Bankruptcy.
Chapter 15: provides a mechanism for foreign debtors to clear debts.
The most common types of personal bankruptcy for individuals are Chapter 7 and Chapter 13. As much as 65% of all U.S. consumer bankruptcy filings are Chapter 7 cases. Corporations and other business forms typically file under Chapters 7 or 11.
A Bankruptcy Exemption defines the property a debtor may retain and preserve through bankruptcy. Certain real and personal property can be exempted on "Schedule C" of a debtors bankruptcy forms, and effectively kept outside of the debtor's bankruptcy estate. Bankruptcy Exemptions are available only to individuals filing bankruptcy, not corporations or municipalities. There are two alternative systems that can be used to "exempt" property from a bankruptcy estate: federal exemptions (only available in a few states), and state exemptions (which vary widely between states).
Individuals filing bankruptcy that claim exemptions must have all exemptions agreed upon by their bankruptcy judge (and/or courts) and by their creditors. This process can become confusing and time consuming, so it is often wise to retain an attorney to assist with filing these forms and attending these proceedings.
Bankruptcy Abuse Prevention and Consumer Protection Act
The Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) of 2005, substantially amended the Bankruptcy Code. Among its many changes to consumer bankruptcy law, BAPCPA created a "means test," which was intended to make it more difficult for individual debtors whose debts are primarily consumer debts to qualify for relief under Chapter 7 of the Bankruptcy Code. The "means test" is employed in cases where an individual with primarily consumer debts has more than the average annual income for a household of equivalent size, computed over a 180 day period prior to filing. If a debtor does not qualify for relief under Chapter 7 of the Bankruptcy Code, either because of the Means Test or because Chapter 7 does not provide a permanent solution to delinquent payments for secured debts, such as mortgages or vehicle loans, the debtor may still seek relief under Chapter 13 of the Bankruptcy Code. A Chapter 13 plan usually does not require repayment to general unsecured debts, such as credit cards or medical bills.
BAPCPA also requires individuals seeking bankruptcy relief to undertake credit counseling with an approved agency prior to filing a bankruptcy petition and to undertake education in personal financial management prior to being granted a discharge under either Chapter 7 or Chapter 13.
If you are considering bankruptcy, you should contact a local bankruptcy attorney who can guide you through the process.
Read more on this legal issueCommon Questions About Bankruptcy
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Disclaimer: While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer.