Bankruptcy law provides a debtor who is unable to pay creditors the opportunity to resolve his or her debts while protected by the Bankruptcy Court from creditor harassment and collection activity. Once a bankruptcy case is filed, an “automatic stay” arises that stops virtually all collection activity against the debtor and his or her property. In most individual bankruptcy cases, the debtor retains all property. This is called a “no asset case” because all of the debtor’s property is “exempt” from the claims of creditors. In a small number of cases, however, the debtor will have assets that are not exempt from creditors’ claims, and the debtor must either use the non-exempt assets or future income to satisfy a certain portion of claims owed by the debtor. When property liquidation or a payment plan is required, the bankruptcy laws provide for the supervised sale and division of assets and/or income in a manner intended to treat all similarly situated creditors fairly and equally.

The bankruptcy laws are intended to provide the honest debtor with a “fresh start,” free from most of their old debts and obligations. The mechanism used to provide the debtor with a “fresh start” is called the bankruptcy “discharge.” In almost all consumer bankruptcy cases, the court grants the debtor a “discharge” of their debts by entering a “discharge order” eliminating the debtor’s obligation to pay pre-bankruptcy debts. A discharge acts like a wall separating a debtor and his property income from the reach of all or most of the debtor’s liabilities that were incurred prior to filing for bankruptcy. After entry of the discharge order, most creditors are forever enjoined (prohibited) from trying to collect against the debtor and/or his or her property.

Eligibility for an individual to file a Chapter 7, Chapter 13, or other type of bankruptcy case is now governed by the “means test” and certain other revisions to the United States Bankruptcy Code made by the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (“BAPCPA”). Although individuals are entitled to file their own bankruptcy case without assistance from legal counsel, BAPCPA has made an already complex area of law even more difficult and confusing. The legal and factual issues that may arise in a case are often difficult to resolve, and the individual stakes are high. Our firm recommends that you seek experienced counsel to help you with your bankruptcy case. If you want to discuss your bankruptcy options, call us at 301-656-4424 or contact us online via our free phone consultation request form.

Types of Bankruptcy

There are four principal kinds of bankruptcies:

1. Chapter 7



2. Chapter 13



3. Chapter 11



4. Chapter 12

What is a Chapter 7 Bankruptcy?

A filing under Chapter 7 is called a straight or liquidation bankruptcy. It is the most common type of bankruptcy proceeding filed. Each debtor is allowed to exempt (that is, keep) all or a certain portion of his or her property. The property that a debtor may exempt is determined by the value of the property in terms of dollars, the type of the property (for example, a retirement account), or the manner in which the property is owned by the debtor (for example, whether the property is owned solely by the debtor or owned jointly with a spouse). All property that a debtor cannot “exempt” is considered “non-exempt property”. A trustee is appointed by the bankruptcy court, to collect non-exempt property of the debtor, liquidate it (that is, sell it) and distribute the net sale proceeds to creditors. However, the vast majority of Chapter 7 bankruptcies are "no-asset" bankruptcies, where the debtor is permitted to keep all of his or her property and nothing is distributed to creditors.

What is a Chapter 13 Bankruptcy?

A filing under Chapter 13 is essentially a reorganization of the debts of an individual who has a regular source of income. It is called reorganization because under Chapter 13, the debtor agrees to a plan, subject to Bankruptcy Court approval, to pay all or a portion of his or her debt through future monthly payments. In a Chapter 13, the debtor is allowed to keep or surrender his or her property at the debtor’s election. One of the most beneficial aspects of a Chapter 13 case is that interest stops accruing on the debtor’s credit card and most other unsecured debts. In most instances, a debtor contemplating bankruptcy is incurring interest charges at an extremely high rate, often between 25-30% per annum, making it almost impossible to pay-off existing credit cards and consumer loans. Chapter 13 bankruptcy often stops the interest on these debts and enables the debtor to “see the light at the end of the tunnel.

” Only individuals may file a Chapter 13 bankruptcy. In Chapter 13, the court looks at the debtor’s income and expenses and determines the amount that must be repaid to creditors, including the monthly payment and time period for the repayment plan. The monthly payment and repayment period are determined under a formula set by the new bankruptcy law. Under the formula, the court determines the Debtor’s current monthly income and allowable monthly expenses. The amount that remains after deduction of these allowable expenses from the debtor’s “current month income” is the debtor’s “disposable income”. This results in determining a monthly plan payment for the debtor. The debtor pays his or her monthly plan payment to a court appointed trustee, called the Chapter 13 Trustee, who divides it up and distributes it to the case creditors in order of priority and over a specified period of time. Chapter 13 bankruptcy can be used to stop a foreclosure and pay-off past due mortgage arrearage over a long period of time, pay-off the amount past due on child support obligations, pay old tax liabilities, pay car loans and other secured debts, and in certain circumstances, even recover a car previously repossessed. A Chapter 13 case can be complex and has certain debt limitations that sometimes make it unavailable for certain individuals who have large secured and/or unsecured debts.

What is a Chapter 11 Bankruptcy?

A Chapter 11 Bankruptcy case is very complex, and is generally used to reorganize the financial affairs and debts of a corporation or other business entity. Often, Chapter 11 cases are used to reorganize business debts through a combination of asset liquidations, the “cramdown” of mortgages and other secured loans, and the creation of a plan to a pay a small portion of unsecured debt and trade obligations. Reorganization of a Chapter 11 debtor is accomplished by obtaining court confirmation of a Chapter 11 Plan setting for the amount, manner, and timing of payment to various classes of creditors. Although generally reserved for business entities, in appropriate circumstances a Chapter 11 bankruptcy may be the best course of action for certain individual debtors. In some cases, the amount of debt owed by an individual makes that person ineligible for Chapter 13, but a good candidate to file under Chapter 11. In other cases, the greater flexibility of Chapter 11 makes it a better type of bankruptcy case for certain individuals having unusually complex financial problems.

What is a Chapter 12 Bankruptcy?

A filing under Chapter 12 is reserved for reorganization of the debts of family farmers. Chapter 12 is a complex mixture of the rules found in Chapter 13 and Chapter 11 and provides a family farmer with the ability to reorganize his or her business affairs.

Filing for Bankruptcy

After a bankruptcy case is filed, creditors, for the most part, may not seek to collect their debts outside of the bankruptcy court case. In a limited number of circumstances, however, a creditor may have the right to ask the bankruptcy court for permission to attempt to collect a debt in another court or forum. These circumstances are limited and strictly controlled by the bankruptcy court. Additionally, the debtor must ask the bankruptcy court for permission to sell property, obtain a new mortgage or secured loan, or engage in certain other financial transactions. In certain instances involving preferential payments or fraudulent conveyances, the bankruptcy court can look back and invalidate or reverse certain pre-bankruptcy transfers of property, mortgages and other similar transactions. Various provisions of the Bankruptcy Code establish the priority of creditors' interests and claims.

Bankruptcy law is federal statutory law contained in Title 11 of the United States Code. Congress passed the Bankruptcy Code under its Constitution power to make uniform bankruptcy laws. Accordingly, states may not enact their own bankruptcy laws. However, they do retain an important role in the bankruptcy process. The states have been authorized to pass laws that govern the amount and kind of exemptions available to a debtor in a bankruptcy case. Almost all states have enacted their own exemption laws containing substantially different properties and amounts that can be retained by a debtor. The selection and application of exemptions is complex, involving the interplay of state and federal law. The selection of proper exemptions and the application of the proper exemption scheme is often one of the most important considerations in any bankruptcy case.

Bankruptcy proceedings are supervised by and litigated in the United States Bankruptcy Courts. These courts are a part of the District Courts of The United States.