COMMON QUESTIONS ABOUT BANKRUPTCY

What is bankruptcy? What debts are discharged? What are the procedures for filing?

People who are having difficulty paying their debts sometimes consider bankruptcy to obtain relief from collection efforts, eliminate some or all of their debts, or restructure their debt payments to a more manageable level. This pamphlet gives you general information about bankruptcy and is not a substitute for consulting qualified legal advisors.

What is Bankruptcy?

Bankruptcy is a uniform, federal court-supervised procedure to relieve individuals and businesses from debts, while protecting and preserving the rights of secured creditors and providing unsecured creditors with equal treatment of their claims.

There are four types of bankruptcy that individuals may select, depending on their particular financial circumstances. Most individuals file under Chapter 7 of the Bankruptcy Code (the Code), sometimes known as "straight" or "liquidation" bankruptcy. Chapter 11 is available to individuals, but generally is used by corporations to reorganize their business affairs. Chapter 12 is designed for use by farmers. Chapter 13, also referred to as a "wage-earner" or "debt-adjustment" plan, is available to individuals and unincorporated businesses that intend to use future income to pay some or all of one's debts according to a plan designed by the individual (within certain statutory limitations) to meet his or her needs.

Who May Declare Bankruptcy?

There are relatively few limitations on who can file bankruptcy. The decision of whether to file, and under what Chapter, is based on each individual's need for relief from debts, their ability to pay, and their capacity and willingness to undertake a procedure that will have long-term consequences on their financial life. Prospective debtors must also undergo a Means-Test to determine whether they are eligible to file under Chapter 7. This "test" generally applies to those whose annual income exceeds the median income for a similar-sized family in the State. A debt-counselor or attorney can help you consider alternatives to bankruptcy.

Who Is Involved in the Bankruptcy Proceedings?

In general, bankruptcy proceedings under any Chapter involve:

the debtor – the person who files bankruptcy, also known as "the petitioner";
the creditors – any persons, firms, or entities that claim the debtor owes them money;
the trustee – a court-appointed person who administers the bankruptcy proceedings and any property available for distribution to creditors (called the bankruptcy estate). The trustee represents the interests of the unsecured creditors, and must liquidate nonexempt assets, investigate the debtor's financial affairs, examine creditors' proofs of claim, provide information to parties in interest, file reports, estate tax returns and recommend, when appropriate, criminal or civil proceedings against the debtor who has committed fraud or other crimes in connection with the case.
the bankruptcy judge – who presides over any hearings on disputed matters in connection with the case.
the credit counselor – an independent financial advisor who must certify both before filing and before the debtor's discharge is granted that the debtor has completed the required credit counseling and financial management courses.

What Constitutes the Bankruptcy Estate?

In general, the bankruptcy estate consists of all property owned by the debtor or in which the debtor has an interest whether individually or as a co-owner with any other person. In a Chapter 13 case, this also includes post-filing income from all sources, including the income of a non filing spouse. The estate includes property the debtor acquires by gift, devise, inheritance, divorce settlements, and life insurance proceeds the right to which arises within 180 days after the filing of the case, and also includes property recovered by the trustee under certain Code provisions. The estate is reduced by exempt assets.The balance of any property remaining for administration by the trustee constitutes the final bankruptcy estate.

What Procedures Are Involved in Filing for Bankruptcy?

Bankruptcy involves a series of steps that usually include the following actions:

The debtor gathers financial information for use in preparing the petition for bankruptcy and the schedules of assets, debts, income and expenses, the statement of financial affairs, and statement of intentions concerning secured debts;
Obtaining the required pre-filing credit counseling;
The debtor files the petition, schedules, statement of financial affairs, and pays the filing fee to the bankruptcy court;
The court notifies scheduled creditors of the case filing, the meeting of creditors, the injunctive stay against creditor actions, the last date for creditors to file challenges to the debtor's discharge or the dischargeability of a particular debt, the initial status of assets available in the case, and other pertinent information;
The debtor appears under oath and on record before the trustee to be examined at the meeting of creditors and submits to creditors' questions;
The debtor completes the reaffirmation, redemption, or surrender of secured collateral according to the Statement of Intentions filed with the case; and
All parties receive the discharge notice approximately 90 days after filing a Chapter 7 case or at the conclusion of payments in a Chapter 13 case.

A discharge will not be issued unless the debtor has completed a prescribed course in financial management.