In ancient times, bankruptcy did not exist. People who were not able to pay their debts were put into jail or forced into what was called “debt slavery”. But, imprisoning debtors did not provide economic benefits to society so laws were made to regulate the financial structure of debtors experiencing financial distress. The first bankruptcy law in the United States can be traced back as far as the early 1800s. The modern bankruptcy laws we have today, however, were based on the major legislative overhaul that occurred in 1978. Since then, bankruptcy laws had gone through a series of amendments, with the latest major changes made in the year 2005. Today, a lot of Americans file for bankruptcy for protection. But, what is bankruptcy and how does it serve as a bail out for those in debt?
Bankruptcy is the legal process wherein an individual declares himself unable to settle his outstanding debts. Bankruptcy is generally aimed at giving insolvent individuals the opportunity to have brand new financial start. There are numerous reasons why a person may be in need of bankruptcy protection. Failed business, divorce, lost job or employment, an accident or injury, a serious illness, and large medical bills are all situations that may force a person into bankruptcy. A person may be declared bankrupt in two ways: 1.) By lodging a “Debtor’s Petition”, or 2.) Through court application by a creditor, a ‘Creditor’s Petition’ for a sequestration order. Generally, when a debtor submits a voluntary petition (“Debtor’s Petition”), his or her bankruptcy case immediately commences.
But, exactly what is bankruptcy and what do they mean about Chapter 7 and Chapter 13 bankruptcy? As mentioned earlier, bankruptcy is a legal process and hence, must occur through a court system. If you wish to apply for bankruptcy, the first thing that you need to do is to determine which type of bankruptcy you’re eligible for. There are basically two types of personal bankruptcies available to consumers – Chapter 7 (liquidation) and Chapter 13 (reorganization).
Chapter 7 bankruptcy, or also known as “straight bankruptcy” is the more common type. As much as 65 percent of all U.S. citizen bankruptcy filings are actually Chapter 7 cases. This type of bankruptcy cancels your debts, but you might have to let the ruling court liquidate (sell) some of your assets for the benefit of your creditors. With Chapter 13 bankruptcy, you can hold on to your assets. But, you have to pay back all or a portion of your debts over a three to five-year period. Remember though that bankruptcy is not for everyone so try to review the law and check the eligibility requirements for each chapter.
When you become bankrupt, your creditors are notified about it right off the bat by the bankruptcy court. The moment they receive the notice, they are required by law to stop pursuing you for payment. You will remain “bankrupt” for a period normally lasting three years.
Once you are declared bankrupt by the court, a trustee is designated to administer the bankrupt estate. It is the responsibility of the trustee to liquidate or sell your property for the benefit of your creditors. Remember, however, that certain types of property cannot be sold by the trustee such as ordinary household items, ordinary personal items, assets held by you on behalf of another person (e.g. child’s bank account), motor vehicles with an equity position no greater than the ‘indexed amounts’ threshold, and many more. For a complete guide, you can always refer to the Bankruptcy Code located at Title 11 of the United States Code.
With very few exemptions, the bankruptcy laws generally do not demand restrictions on your employment or profession. Meaning, you can still continue to earn an income and seek employment opportunities. If your income goes beyond a certain threshold, however, you will be asked to pay compulsory contributions from your income to the trustee. Your income will be evaluated each year all throughout while you’re in a state of bankruptcy (normally 3 years). Income contributions, in general, are only payable during the period of bankruptcy.
We may have answered the question “What is bankruptcy?”. But in reality, things are not as simple as they are explained here. Remember, this is just an overview. If things become a little difficult to handle, a bankruptcy attorney can help you in your application for bankruptcy. This, of course, is another addition to your weekly or monthly expenses. But, if a lawyer can assist you in your attempt to get a form of debt relief through bankruptcy, then every cent you pay your lawyer is going to be worth it.