Bankruptcy is a proceeding under federal law whereby you seek partial or complete relief from the payment of your debts. This initial relief is provided in the form of an “automatic stay” issued automatically and immediately upon the filing of the bankruptcy petition which, with a few narrow exceptions, stops all creditor collection activities, including suits and foreclosures. The final relief comes near the end of the case when the bankruptcy court enters in order eliminating your responsibility to pay certain debts. This final order is called the “discharge.”
Chapter 7 Bankruptcy
In a Chapter 7 bankruptcy proceeding the debtor seeks to be relieved from the responsibility to pay his debts. In exchange for having the debts discharged, the debtor must give up any property that is not protected or “exempted” from the Chapter 7 trustee. The property that the debtor exempts is free from the claims of all pre-bankruptcy creditors. The bankruptcy trustee then gathers and sells the debtor’s nonexempt assets and uses the proceeds of such assets to pay the creditors in accordance with the provisions of the Bankruptcy Code. In order to qualify to file a Chapter 7 bankruptcy, the debtor must pass a “means test”. This test prevents a debtor from filing if he has the ability to pay his debts. In most of the Chapter 7 cases our office files, all of our client’s property is exempt, so the client gives up no property.
Chapter 11 Bankruptcy
A case filed under chapter 11 of the United States Bankruptcy Code is frequently referred to as a “reorganization” bankruptcy. It is available to individuals, corporations and partnerships. The person or business in Chapter 11 usually remains in possession of their assets, and continues to operate their business. The person or business in Chapter 11 is a fiduciary for the creditors, and is expected to propose a plan to the court which would allow the creditors to be paid as much or more than the creditors would receive in a liquidation.Once a Chapter 11 plan is submitted to the bankruptcy court for approval, creditors are given a chance to vote on the approval of the plan. If a creditor objects to their treatment under a plan, the debtor can attempt to “cram down” a plan on the creditor and get the plan confirmed despite creditor opposition. Once the plan is accepted by the court, the debtor and creditors are bound to the terms of repayment.
Chapter 13 Bankruptcy
A Chapter 13 bankruptcy is sometimes called a wage earner’s plan. It is used by individuals with regular income to develop a plan to repay all or part of their debts. In the Chapter 13 proceeding, debtors propose a repayment plan to make payments to creditors over time. The plan may not provide for payments over a period longer than five years.