Bankruptcy is a debt relief program authorized by the United States Constitution, governed by the United States Bankruptcy Code and a specialized Bankruptcy Court Rules, and operated through the federal court system. The primary goal of the bankruptcy laws is to give debtors a financial “fresh start” from burdensome debts. The United States Supreme Court put it best:
[I]t gives to the honest but unfortunate debtor…a new opportunity in life and a clear field for future effort, unhampered by the pressure and discouragement of preexisting debt.
Bankruptcy cases have their own court. It’s called the United States Bankruptcy Court. A bankruptcy debt relief program helps debtors who are having difficulty paying their debts. A person, a corporation or other legal entity that is having difficulty paying its debts may declare bankruptcy by filing a Petition with the United States Bankruptcy. At that moment, the debtor receives the Court’s immediate protection from creditors.
Article I, Section 8, of the United States Constitution authorizes Bankruptcy. Congress enacts the bankruptcy laws and rules. Congress enacted the “Bankruptcy Code” in 1978 and the Code has been amended several times since then. It is the law that governs all bankruptcy cases. Bankruptcy Courts have their own rules; the Federal Rules of Bankruptcy Procedure (often called the “Bankruptcy Rules” regulate how the debtor’s case is managed in the court. There are 90 bankruptcy Courts in the United States. Each state has at least one bankruptcy Court, but most states have several courts. Michigan has two Bankruptcy Courts, and those Courts operate in eight locations; Detroit, Flint, Bay City, Grand Rapids, Lansing, Kalamazoo, Traverse City and Marquette.
A bankruptcy case starts with the filing of a Petition. The moment that that Petition is filed, the Bankruptcy law automatically and immediately imposes an order directing all creditors from taking any further collection actions against the debtor’s property and against the debtor and all co-debtors, individually. If a creditor demands payment, garnishes accounts or paychecks or repossesses property after the case is filed, may be sanctioned by the Court. The “Automatic Stay” goes into effect immediately, even when the creditor has no idea that a bankruptcy was even filed. The Automatic Stay is the Court’s powerful protection from creditors.
After the case is filed, the Court will appoint a Trustee to help the Court administer the case. The Trustee’s job is to determine whether the debtor has any income or assets that can be used to pay creditors all or part of the debt. Depending upon the Chapter of the case that is filed, the Trustee has the power to sell property, lease property or receive a portion of the debtor’s paycheck or other income to pay debts. Under the Bankruptcy Code, some of the debtor’s assets and income is “exempt”, meaning the Trustee may not take it or use it to pay creditors. In some cases, all the debtor’s assets are exempt, and in other cases, the Trustee is able to sell some property. It is the debtor’s Bankruptcy Attorney to evaluate the debtor’s income and assets and to advise the debtor whether the debtor’s assets can be sold or how much of the debtor’s income from employment will belong to the Trustee.
A debtor’s involvement with the bankruptcy judge is usually very limited. A typical chapter 7 debtor will not appear in court and will not see the bankruptcy judge unless an objection is raised in the case. A chapter 13 debtor may only have to appear before the bankruptcy judge at a plan confirmation hearing. Usually, the only formal proceeding at which a debtor must appear is the meeting of creditors, which is usually held at the offices of the U.S. trustee. This meeting is informally called a “341 meeting” because section 341 of the Bankruptcy Code requires that the debtor attend this meeting so that creditors can question the debtor about debts and property.
After the 341 hearing, if there are no complications, the debtor may not have to return to Court at all. In a chapter 7 case, in the absence of any objections of creditor’s or the Trustee, the debtor can expect a discharge of his or her debts within about 3 months from filing. In a Chapter 13 case, the debtor will propose a repayment plan to the Court. A Chapter 13 repayment plan may pay debts over three to five years. A plan can be shorter than three years if it pays all creditors 100% of their debts.
There are several types of bankruptcy petitions that can be filed; they are called “Chapters”. Each chapter is designed to a specific type of debtor. Depending upon the chapter filed, a debtor may completely eliminate their debt (called a “discharge”), they may modify the terms of the debt to make it easier to pay, (including reducing the amount owed, change the length of the loan term and the interest rate of debt), or they can pay the debt as it is over time but under the Court’s protection. The Chapters are:
Chapter 7, called a “Liquidation”. In this chapter, a trustee takes over the debtor’s assets. Some of these assets are protected (“exempt”), but if they are not exempt, the Trustee reduces them to cash, and pays the money to creditors. In many cases, all the debtor’s assets are exempt and the Trustee sells nothing at all. The debtor normally receives a discharge just a few months after the petition is filed. The debtor must pass a “means test” to determine whether they qualify to file a chapter 7. If a debtor makes too much income from employment, or has the ability to pay a portion of the debts from their wages, a debtor may not be eligible for chapter 7 relief.
Chapter 9, entitled Adjustment of Debts of a Municipality. Only cities and towns, as well as villages, counties, taxing districts, municipal utilities, and school districts may file a Chapter 9 case.
Chapter 11, entitled Reorganization, ordinarily is used by large businesses or individuals with unusually large amounts of debt.
Chapter 12, entitled Adjustment of Debts of a Family Farmer or Fisherman with Regular Annual Income, provides debt relief to family farmers and fishermen with regular income..
Chapter 13, entitled Adjustment of Debts of an Individual with Regular Income. An individual debtor who has a regular source of income proposes a “plan” to repay creditors over time – usually three to five years. . Chapter 13 is often better for a debtor than a chapter 7 because it enables the debtor to keep a valuable asset, such as a house, which would have been sold if the debtor filed a Chapter 7 case. The debtor must complete all payments required under the plan before the discharge is received.
Chapter 15, entitled Ancillary and Other Cross-Border Cases. It is used to manage a bankruptcy of a debtor with income, assets or business in several countries.
The bankruptcy process is complex, no matter which chapter you uses. A successful bankruptcy case starts with the selection and consultation with a qualified Bankruptcy attorney who specializes in Bankruptcy. It is very important to select an attorney that specializes in bankruptcies because the law and rules of bankruptcy are complicated and different from other areas of law. There can be unfortunate consequences if the law and rules are not followed or if a proper pre-petition analysis of the debtor’s income and assets is not performed properly. Bredow Law specializes in bankruptcies for consumers. When you are a Bredow Law client, our experience and skill allow us to give you the highest quality and most cost-effective bankruptcy representation. If you or someone you know has questions about bankruptcy, Contact Bredow Law at (248) 795-5516 or by email info@bredowlaw.com
