The Bankruptcy Process - General FAQ

The “Bankruptcy Code” was enacted by Congress in 1978 and codified as title 11 of the United States Code. Since it’s inception, bankruptcy law has been amended several times with the latest changes posted in August 2010. The bankruptcy code is the uniform federal law that governs all bankruptcy cases.

Bankruptcy laws help people who can no longer pay their creditors, get a fresh start either by liquidating assets to pay debts or by creating a repayment plan. Bankruptcy laws also protect troubled businesses and provide for orderly distributions to business creditors through reorganization or liquidation.

Most cases fall under the three main chapters of the Bankruptcy Code: Chapter 7Chapter 11, and Chapter 13. Federal courts have exclusive jurisdiction over bankruptcy cases, which means you cannot file bankruptcy in a state court. (Chapter 12 is for family farmers)

  1. Bankruptcy Procedural Process
  2. Debtor’s Involvement in the Bankruptcy Process
  3. Purpose of Bankruptcy
  4. Chapter 7 Bankruptcy – Liquidation
  5. Chapter 13, Adjustment of Debts (repayment plan)
  6. Bankruptcy Terms and Definitions

Up | 1. Bankruptcy Procedural Process

The Federal Rules of Bankruptcy Procedure (often called the”Bankruptcy Rules”) and local rules of each bankruptcy court govern the procedural aspects of the bankruptcy process.  The Bankruptcy Rules contain a set of official forms for use in bankruptcy cases. The Bankruptcy Code and Bankruptcy Rules (and local rules) set forth the formal legal procedures for dealing with the debt problems of individuals and businesses.

There is a bankruptcy court for each judicial district in the country, and each state has one or more districts. There are 90 bankruptcy districts across the country. The bankruptcy courts generally have their own clerk’s offices.

Much of the bankruptcy process is administrative and thus conducted away from the courthouse. In cases under chapters 7, 12, or 13, and sometimes in chapter 11 cases, this administrative process is carried out by a trustee who is appointed to oversee the case.

Up | 2. Debtor’s Involvement in the Bankruptcy Process

Your involvement with the bankruptcy judge is usually very limited. Typically, under chapter 7, you do not appear in court or see the bankruptcy judge unless an objection in the case occurs.

Under chapter 13, you may only have to appear before the bankruptcy judge at a planned confirmation hearing. Usually, the only formal proceeding at which you’ll have to appear is the meeting of creditors, usually held at the offices of the U.S. trustee. The meeting also called a”341 meeting” because section 341 of the Bankruptcy Code requires you to attend so creditors can question you about debts and property.

Up | 3. Purpose of Bankruptcy

A fundamental goal of the federal bankruptcy laws enacted by Congress is to give debtors a financial “fresh start” from burdensome debts.

Up | 4. Chapter 7 Bankruptcy – Liquidation

Under Chapter 7 bankruptcy, a court-appointed trustee takes over your assets and reduces them to cash, and then makes distributions to creditors, subject to your right to retain certain exempt property and the rights of secured creditors.

Most consumers in financial crisis, who qualify for chapter 7, usually have little or no nonexempt property, so there is often no actual liquidation of their assets. These Chapter 7 bankruptcy cases are called “no-asset cases.”

Creditors who hold an unsecured claim against you must file a proof of claim with the bankruptcy court to receive a distribution from your bankrupt estate. In most chapter 7 cases, you’ll receive a discharge that releases you from personal liability for certain dischargeable debts within a few months after filing your bankruptcy petition.

Use this FREE! Chapter 7 Means Test Form to see if you are eligible for chapter 7 protection.

Up | 5. Chapter 13, Adjustment of Debts (repayment plan)

Chapter 13 bankruptcy is for individuals who have a regular source of income. Chapter 13 is often preferable to chapter 7 because it enables you to keep a valuable asset, such as a house, and because it allows you to propose a “plan” to repay creditors over time (usually three to five years).

Important Note: If you do not qualify for chapter 7 relief under the means test, then you’ll have no choice but to enter bankruptcy protection under Chapter 13.

Up | 6. Bankruptcy Terms and Definitions

The bankruptcy process is complex and relies on legal concepts like the “automatic stay,” discharge,” “exemptions,” and “assume.” Use this glossary of Bankruptcy Terminology to learn, in layman’s terms, about most of the legal concepts that apply to bankruptcy protection cases.