Understanding Bankruptcy
Bankruptcy is a set of federal laws and rules that help individuals and businesses who owe more debt than they can pay. Each of the 94 federal judicial districts handles bankruptcy matters, and in nearly all districts, these cases are filed in the bankruptcy court—not in state court.
Bankruptcy laws allow people who can no longer pay their creditors to get a fresh start by either liquidating their assets to pay off debts or by creating a repayment plan. They also help troubled businesses by providing procedures for reorganization or liquidation, ensuring that creditors are repaid in an orderly manner. These procedures are outlined in Title 11 of the United States Code, also known as the Bankruptcy Code.
Most cases are filed under one of three main chapters of the Bankruptcy Code: Chapter 7, Chapter 11, or Chapter 13. Federal courts have exclusive jurisdiction over bankruptcy cases, meaning these cases cannot be filed in state court.
Purposes of Bankruptcy Law
The primary goals of bankruptcy law are:
- To give an honest debtor a “fresh start” by relieving most debts; and
- To repay creditors in an orderly manner, to the extent the debtor has property available for payment.
Some bankruptcy cases allow a debtor to reorganize and develop a plan to repay creditors, while others involve the liquidation of the debtor’s property.
Filing a Bankruptcy Case
A bankruptcy case typically begins when the debtor files a petition with the bankruptcy court. This petition may be filed by:
- An individual;
- A husband and wife jointly; or
- A corporation or other entity.
The debtor must also file detailed statements listing assets, income, liabilities, and the names and addresses of all creditors, along with the amounts owed.
Once the petition is filed, an automatic stay takes effect. This stay prevents debt collection actions against the debtor and their property. While the stay is in place, creditors cannot:
- File or continue lawsuits;
- Garnish wages; or
- Make phone calls demanding payment.
The Clerk of Court sends notice to creditors that the debtor has filed a bankruptcy petition.
Discharge and Litigation
In many consumer bankruptcy cases involving liquidation, there is little or no money available to pay creditors. These cases are often resolved without disputes, and the debtor is usually granted a discharge of most debts—meaning they are no longer personally responsible for repayment.
However, some cases involve disputes that lead to litigation. These disputes may concern:
- Ownership or value of property;
- The amount owed on a debt;
- Whether certain debts can be discharged; or
- Payments to professionals such as attorneys or accountants.
Litigation in bankruptcy court proceeds much like a civil case in district court, including discovery, pretrial proceedings, settlement efforts, and trial.
Resources
Local Rules and Orders
- Bankruptcy Local Rules
- General Orders and Notices
- Bankruptcy General Court Procedures – Part I
- Bankruptcy General Court Procedures – Part II