TV and the movies often depict bankrupts as being unscrupulous people using legal loopholes to escape from their creditors. That scenario could still happen but it is rather unlikely.
Legal Basis
In the US, bankruptcy is part of the Constitution (Article 1, Section 8, Clause 4) wherein Congress is authorized to enact “uniform Laws on the subject of Bankruptcies throughout the United States.” The laws enacted by Congress as general and permanent Federal Laws are compiled together as “The Code of Laws of the United States of America” which is often referred to as the U.S. Code (or U.S.C.). Bankruptcy law is primarily covered by U.S.C. Title 11 but bankruptcy crimes are found in Title 18; tax implications of bankruptcy in Title 26; and the creation and jurisdiction of bankruptcy courts are in Title 28. If all this sounds complicated; it is however necessary in order to curb the abuses shown in fiction.
Chapters
Title 11 is subdivided into Chapters and it is Chapters 7, 11, 12 & 13 that are most likely to apply to any “man (or woman) in the street” that gets involved with bankruptcy though inability to pay off their debts. Chapter 7 deals with liquidation and is probably the most common form of bankruptcy; a trustee is appointed to collect what is called the non-exempt property of the debtor; this is then sold off and the proceeds distributed amongst the creditors. However, different States have different rules permitting debtors to keep what is considered their “essential property” making these exempt from liquidation proceedings; as a result, many Chapter 7 cases fail to raise sufficient funds to clear all the debts.
Chapters 11 to 13 are a more complex reorganization; involving the debtor keeping some or all of their property and using future earnings to pay off debts. Chapter 11 is normally used by corporate entities and Chapter 12 is restricted to the likes of “family fishermen or farmers”. Individuals who are not filing under Chapter 7 are most likely to enter Chapter 13 proceedings. It should be noted that it is very rare for creditors to instigate proceedings against an individual debtor; more often than not, the debtor instigates a plea for “voluntary bankruptcy”.
It’s Your Choice; Do You have The Knowledge To Make It?
From the above, it should be seen that there is an incredible amount of Federal law influencing who can; when and how to apply for bankruptcy. If that wasn’t bad enough, there are also State regulations to consider. Anyone approaching this dire strait should owe it to themselves to seek advice and discuss their options with a bankruptcy attorney in Palm Desert.
