Many individuals and companies are finding themselves in difficult financial situations as a result of COVID-19. Some may ask themselves, “Is filing for bankruptcy an option for me or my business?” Here are some terms and laws to come familiar with regards to bankruptcy and how it works. According to The Legal Information Institute at Cornell Law School;
Bankruptcy law provides for the reduction or elimination of certain debts. It can provide a timeline for the repayment of nondischargeable debts over time. It also permits individuals and organizations to repay secured debt–typically debt with real estate or personal property like vehicles pledged as collateral–often on terms more favorable to the debtor.
Federal bankruptcy law is contained and outlined in Title 11 of the U.S. Code. Under its constitutional grant of authority, Congress passed the Bankruptcy Code to “establish… uniform laws on the subject of Bankruptcy throughout the United States.” See U.S. Constitution Article I, Section 8. States may not regulate bankruptcy, but they may pass laws that govern other aspects of the relationship between the debtor and creditor. Several sections of Title 11 incorporate the debtor-creditor law of the individual States.
Bankruptcy proceedings are supervised by and litigated in Bankruptcy Court, part of the Federal District Court system. Congress established the U.S. Trustee Program to oversee the administration of bankruptcy proceedings and authorized the U.S. Supreme Court to promulgate the Federal Rules of Bankruptcy Procedure.
Types of Bankruptcy
Chapter 7 provides for the discharge of unsecured debt, such as debt from credit cards and personal loans. Secured debt is typically unaltered, meaning that the collateral securing the debt remains in the debtor‘s possession as long as timely payments are made. Chapter 7 is always available to corporations and individuals with primarily business debt. Otherwise, individuals cannot file a Chapter 7 petition unless they meet specific income requirements.
Chapter 9 governs municipalities’ reorganization and related local entities, such as county-owned hospitals and school districts. Individuals and corporations cannot file for Bankruptcy under Chapter 9.
Chapter 11 is the most comprehensive chapter of the Bankruptcy Code; it provides myriad options to reorganize debt. For example, by repaying some debts, discharging others, and restructuring the remainder. Although individuals may file for Chapter 11 relief, the relatively high filing fees and administrative costs lead most individuals to favor Chapter 7 or Chapter 13 bankruptcy proceedings.
Chapter 12 provides for the restructuring of debt for family farmers. Only family farmers (as defined in Sec. 101 of Title 11) are eligible. Though not analogous, it shares many characteristics with a Chapter 13 proceeding.
Chapter 13 permits the discharge of some debt and other debt repayments over three to five years. It may also allow a reduction in principal owed on secured debt or eliminating these debts. It can also structure a repayment plan for debt that cannot be discharged in bankruptcy. Only individuals may file under this chapter, and there are some limited income and debt qualifications.
Recent tax debt and child support, criminal restitution, and student loans will typically not be discharged in bankruptcy unless they are repaid in full by the debtor during the proceeding.
Individuals are permitted to keep certain assets without regard to the type of bankruptcy sought. For example, Individual Retirement Accounts (IRAs) are protected under § 522(d) of Title 11. They thus cannot be involuntarily used to repay creditors in a bankruptcy. Varying levels of home equity are also often protected, as are personal vehicles in varying amounts.
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