Understanding Bankruptcy Laws


The purpose of the bankruptcy law is to give honest people a way to get out of debt and start over again. The law does not help those who think they can simply avoid a debt they want to eliminate for whatever reason. This is an important distinction to understand. Filing bankruptcy is a serious decision with long reaching consequences on your credit, but for millions of people it is also a law that offers hope for a fresh start financially.

The bankruptcy law was revised in October 2005 largely in response to claims by creditors that it was too easy for people to claim bankruptcy just to avoid paying their bills. But if you are in serious financial trouble and cannot honestly pay your debts then the new bankruptcy law's more stringent filing requirements will not delay your bankruptcy.

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The bankruptcy law has many different sections that address both individual and business bankruptcies. The law's intent is to distribute certain assets after statutory exemptions are excluded and then use the proceeds to pay off as much creditor debt as possible. The court determines which creditor gets what amount. All bankruptcies must go through federal district court, though each state has laws concerning the payments to creditors. This is just another example of why you need a bankruptcy attorney.

The bankruptcy law established "chapters" which merely indicates the kind of bankruptcy being filed. Chapter 7 is the one used most frequently by individuals. A court appointed trustee oversees the identification and selling of non-exempt assets and the use of the proceeds to pay debts. In reality, because assets such as a house and car may be exempted, there is often no asset liquidation required. Chapter 11 is used by large corporations that are reorganizing and need to restructure debt in order to survive. There is also a chapter 12 used by farmers and chapter 13 used by individuals asking for a court established and monitored repayment plan.

For individuals filing chapter 7 there are many different aspects to the law which can impact the final result. The law will not allow you to cancel some debts such as child support. The really good news is that you will not lose your home if your debt meets the rules for determining exempt equity. The same is true for your car. You are also allowed to retain cash accounts as long as the sum total does not exceed $10,000. The courts have recently ruled that retirement accounts like IRA's are also exempt.

It's easy to see that the new bankruptcy law has many complex provisions, but the goal of these statutes is to give you an honest chance to start over without a heavy debt burden. Your bankruptcy attorney will assist you throughout the entire process.


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