History and Chapters of Bankruptcy
A bankruptcy law suit aims at helping the debt ridden citizen or an organization to be relieved from the pressures of the existing debts. The goal is achieved by providing the debtor a bankruptcy discharge, which releases him from the personal liability from certain specific debts. It also prohibits the creditors form initiating any legal action to realize their debts. There are various types of bankruptcy laws that provide debt relief or discharge in form of debt liquidation to the debtors.
Chapter 7 of Bankruptcy
Under chapter 7 of bankruptcy, the process of liquidation of debts is supervised by a trustee. The trustee takes over the assets of the debtor’s estate and reduces them into cash. The debtor can seek exemption to retain certain types of assets of his property and also the rights of the secured debtors. In most of the cases under chapter 7 of bankruptcy, the debtor has little or no non-exempt property. Therefore, there may not be any liquidation of the debtor’s assets.
These cases are also called as ‘no-asset cases’. In such cases, the creditor with unsecured claims can get back his loan only if he can file a proof before the bankruptcy court of the existence of assets, which can be reduced to cash. Since there are generally no such assets left with the debtor, he gets away without paying back any unsecured loans. A debtor, if he is an individual, normally receives a discharge within a few months of putting up his application for such relief.
A Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 amended the Bankruptcy Code so that the individual debtor should pass a ‘means test’ to qualify for relief of discharge under the chapter 7. If the income of the debtor is higher than a certain level, he may not be eligible for the relief.
Chapter 13 of Bankruptcy
There is yet another law, which enables the debtor to keep his valuable assets such as house under chapter 13. It allows the debtor to propose a plan to pay off the creditors over a period of three to five years. This provision comes in handy for the debtors who cannot qualify for relief under the ‘means test’ of chapter 7. If the repayment plan of the debtor is confirmed by the court, he can make the payment to his creditors through the trustee of the court and save his asset. The only thing is that unlike in chapter 7, the relief in the form of discharge of debts cannot be availed immediately.
The debtor must fulfill the conditions of repayments. Under chapter 13, the debtor is protected from lawsuits, garnishments and other forms of creditor actions while the repayment plan is under implementation. The discharge of debts is also somewhat broader under chapter 13 than under chapter 7, in the sense, that more debts are cleared off by the repayment plan.
Chapter 11 of Bankruptcy
In case of organization and commercial enterprises the relief through the discharge of debts is provided through an act called Reorganization. This is done under chapter 11. The assets of the debtor under the chapter 11 are not liquidated and he continues to operate his business. In this way, he can also make payments to his creditors. This reorganization of repayment of debt is done through the approval of the court. A debtor, under chapter 11, has to make his proposal for repayment within 120 days of filing the case for bankruptcy.
He has also to file a disclosure statement to his creditors containing a detail of his proposal to clear off their loan. The court ultimately approves or disapproves the plan of reorganization. If the plan is approved and confirmed, the debtor can reduce his loan liability by repaying a part of his obligations and seek discharge for the other debts.
Daniel Wesley
View all articles by Daniel Wesley
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