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Introduction to U.S. Bankruptcy Law



Purposes of Federal Bankruptcy Laws

Bankruptcy cases fall under the jurisdiction of the federal court system. Bankruptcy court litigation is handled just like it is in federal district court for civil proceedings. Counsels typically conduct discovery, pre-trial motions and proceedings, settlement discussions, mediation, and trials. Appeals are possible to the federal district court.

Bankruptcy laws were enacted by Congress for several primary purposes, including the following:

  • to permit debtors to have a "fresh start" financially by freeing debtors of the majority of their debts
  • to provide for payments to creditors in an orderly fashion if a debtor has sufficient resources to make such payments.

Types of Bankruptcy Cases

There are primarily two types of bankruptcy cases available to prospective debtors. The first type of bankruptcy case is a reorganization that gives the debtor a chance to propose a plan for repayment to his or her creditors. Reorganization bankruptcy cases are filed under Chapters 11 and 13.

The second type of bankruptcy case is a liquidation that sells available non-exempt property of the debtor to use proceeds to partially repay the debtor's debts to creditors. Liquidation bankruptcy cases are filed under Chapter 7. In the majority of liquidation cases, there is insufficient money available in debtor's cash, belongings, and property (collectively, the debtor's estate) to repay all of the debtor's creditors. In such instances, there are often very few disputes or issues that arise and are brought before the court because there is little incentive or motive to creditors to fight. In those cases, the debtor is usually granted a discharge of his or her debts with very little creditor intervention, objection, or dispute. Discharges in bankruptcy mean that the debtor is not liable to repay his or her debts any longer, and the financial slate is wiped clean.

Chronology of a Bankruptcy Case

A bankruptcy case starts with a debtor filing a bankruptcy petition with his or her local bankruptcy court, based upon the jurisdiction in which he or she lives. The filing is largely done electronically in most jurisdictions today. Petitions are filed by individual debtors, married couples, corporations, and other types of entities. Along with the petition, a debtor will be required to file other documents or official forms. The other forms include:

  • statements of assets, income, and liabilities
  • a list of creditors with their names, addresses, and amounts they are owed by the debtor
  • other disclosures, budgets and similar financial information

What Is the Bankruptcy Automatic Stay?

The bankruptcy automatic stay is a statutory term of art found in the U.S. Bankruptcy Code (Chapter 11 of the U.S.Code) in Section 362. The bankruptcy petition filing stops or "stays" all collection activities taken against a debtor and the debtor's property. So long as the stay is operational, creditors of the debtor are not permitted to bring any lawsuits, continue any suits, institute wage garnishment actions, or make collection phone calls to the debtor's household.

The creditor is restricted by the automatic stay when he or she receives notice of the bankruptcy filing. That notice is accomplished by a mailing from the bankruptcy court by virtue of disclosures the debtor made of his or her creditors. So long as the creditor is listed in the debtor's filing materials, the creditor will receive notice and filings from the bankruptcy court to be kept abreast of the debtor's bankruptcy filing status and developments.

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