Bankruptcy is an unfortunate reality that many individuals and businesses face. Organizations often consider it as a last resort when they are overwhelmed with debt and have no other options for relief.
However, before considering bankruptcy, it is crucial to understand the basic principles and laws guiding the process. It may also help to consult with a bankruptcy attorney for proper guidance. Here is what you need to know about bankruptcy law.
Understanding Bankruptcy Law
Bankruptcy law constitutes a legal framework enabling individuals and businesses to seek relief from substantial debts by liquidating assets or devising structured repayment plans. Its core objective is to grant debtors a fresh financial beginning while upholding equitable treatment of creditors.
Types of Bankruptcy
Federal law encompasses numerous bankruptcy categories, with the most prevalent being Chapter 7, Chapter 11, and Chapter 13 bankruptcies. In essence, Chapter 7 bankruptcy entails a liquidation process where creditors can sell a debtor’s nonexempt assets to settle outstanding debts. This option typically applies to individuals or entities with limited income and minimal valuable assets.
On the other hand, Chapter 11 bankruptcy is designed primarily for business reorganization. It allows companies to continue operations while developing repayment plans that satisfy their creditors’ claims over time.
Lastly, Chapter 13 bankruptcy offers individuals an opportunity to repay all or part of their debts through a court-approved repayment plan spanning three to five years. Unlike Chapter 7 bankruptcy, this option enables debtors with regular income sources (such as employment) to retain most of their property while repaying debts in manageable installments.
The Bankruptcy Process
Bankruptcy law covers three categories of debts or claims, including secured debts, unsecured debts, and priority claims. Secured debts refer to claims backed by collateral, such as a mortgage or car loan. In bankruptcy proceedings, secured creditors have the right to repossess their collateral if payments are not made.
Moreover, unsecured debts include credit card debt, medical bills, and personal loans without any collateral securing them. These typically form the bulk of most consumer bankruptcies. Creditors holding unsecured debts have lower priority in repayments and may receive only a portion of what they are owed.
On the other hand, priority claims are debts with the first concern under government policy. They include certain taxes, child support or alimony obligations, and employee wages.
Associated Costs of Filing for Bankruptcy
It is crucial to note that filing different bankruptcy petitions attracts certain costs. For instance, individuals and businesses looking to file for Chapter 7 bankruptcy may pay a fee of $338, while those filing for Chapter 13 may pay $313.
However, if the individual or organization faces financial constraints, the court may allow them to pay the filing fee in installments. In cases where the debtor’s income is at or less than 150 percent of the poverty level, the court may grant them a waiver.
The Legal Process of Bankruptcy
Bankruptcy law involves a formal legal procedure that commences with submitting a petition to the court. To avoid mistakes and ensure a smooth process, consider engaging the services of a bankruptcy attorney.
“Federal laws govern bankruptcy proceedings, but certain aspects may vary from state to state. While small bankruptcy cases have been established to handle debtor-creditor disputes, most bankruptcy cases are typically handled by the U.S. Bankruptcy Court,” says attorney Justin Gillman of Gillman Bruton Capone Law Group.