What is Bankruptcy?

by San Antonio Attorney

Bankruptcy is a procedure set out under the jurisdiction of federal law to assist individuals and businesses burdened by debt, but it is not without consequences. Bankruptcy provides an avenue for debtors to seek relief from debt through a prescribed set of procedures governed by the Bankruptcy Code. The bankruptcy process is administered by both federal and judicial district rules – Bankruptcy Rules. As some states have more than one judicial district, petitioners need to be aware of the particular procedural rules applicable to their district.

The bankruptcy process is intended to help debtors, both as individual consumers or as businesses, free themselves from their immediate debt burden either through discharge of the debt or repayment. The process takes place under the jurisdiction of a bankruptcy court and often with the compliance of a court appointed trustee. Bankruptcy procedures can be lengthy and costly. Even for individuals, there are costs involved when filing a petition although the payment of fees can be distributed over a period of months.

Although the intent of the Bankruptcy Code is to assist debtors, the bankruptcy process is complex and varies according to the circumstances of the debtor. In addition, the rights of the creditors must also be taken into account. Therefore, the bankruptcy process is complex. Despite not being necessary, in some cases it may be advisable to engage a lawyer. For one thing bankruptcy involves filing a petition with a court and supplying appropriate documentary evidence. Failure to provide full disclosure of debts and assets, or even loss of assets, may have a negative impact on the outcome, such as the denial of a discharge of debts.

There are six basic bankruptcy procedures; they can be considered as falling into two distinct categories frequently referred to as liquidation or reorganization.  As these terms suggest, there is in the case of liquidation a need to prepare for the loss of non-exempt assets in accordance with the debt to be discharged. The liquidation approach often requires a means test.

The reorganization approach can apply to individuals who have sufficient income to make progress on debt repayment with the assistance of a particular bankruptcy procedure and can be a way to forestall foreclosure on property. Also, reorganization generally applies to businesses or family endeavors such as farms. Under the reorganization approach, the debtor must adhere to an approved repayment plan. This plan usually encompasses a timeframe of three to five years.

Both categories of bankruptcy provide debtors with relief from creditors’ actions once the petitions have been filed. However, both categories also have procedural rules that apply to exempt and non-exempt property, who can file a petition under a specific chapter and what debts can be discharged. Although bankruptcy is intended to reduce or eliminate debt such as consumer debt and unsecured loans, not all debt can be dealt with this way. Familial obligations such as the support of children or a spouse are not covered under bankruptcy procedures, so these debts cannot be discharged.

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