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Bankruptcy: An Overview

Created by FindLaw's team of legal writers and editors.   Edited down to relevant info for JPA training. Full article HERE.

Most people have heard the term "bankruptcy" and understand that it has something to do with being broke. Below is an overview of bankruptcy, the main goal and its types, followed by JPA policy and precedures for a Bankruptcy file. See FindLaw's Bankruptcy Basics section for additional articles and resources.

Bankruptcy: Origins and Background

Several early attempts at creating universal bankruptcy rules, beginning in 1800, were amended and eventually repealed until passage of the so-called "Nelson Act" in 1898. Specifically, the Nelson Act gave companies the option of discharging debts but did extend those same protections to consumers.

In 1978, using the authority granted by Article I, Section 8 of the U.S. Constitution, Congress enacted the much broader "Bankruptcy Code." The 1978 Act, with some later amendments, is the bankruptcy law in effect to today in the United States. Eligible debtors may commence bankruptcy cases under Chapters 7, 11, 12, 13, or 15. Certain creditors may commence involuntary bankruptcy cases under some of the chapters. 

How Bankruptcy Courts Work

While most court cases are heard in either civil or criminal court, bankruptcy has a dedicated system of courts throughout the country. Each judicial district in the U.S. has its own bankruptcy court, while each state has at least one district (90 districts total).

 

United States bankruptcy judges have the authority to make binding decisions in bankruptcy cases, such as eligibility issues or whether to grant a debt discharge. However, most aspects of the bankruptcy process are done outside of the court. For example, an appointed trustee carries out the administrative duties of Chapter 7, Chapter 13, and other types of bankruptcy cases.

 

The debtor actually has very little interaction with the bankruptcy judge. Most Chapter 7 applicants don't even set foot in court and only see the judge if there are objections to the bankruptcy plan. Chapter 13 debtors typically appear in court just once, at the bankruptcy plan confirmation hearing. The informal meeting of the creditors (also called a "341 meeting," based on Section 341 of the Code) is typically held at the trustee's office.

 

Bankruptcy's Main Goal

Federal bankruptcy laws are intended to allow debtors a way out of particularly heavy debts, giving consumers and businesses a fresh start where all other options have failed. A 1934 U.S. Supreme Court decision described bankruptcy's role as follows:

It gives to the honest but unfortunate debtor a new opportunity in life and a clear field for future effort, unhampered by the pressure and discouragement of preexisting debt. Local Loan Co. v. Hunt, 292 U.S. 234, 244 (1934).

The bankruptcy discharge, a court order releasing the debtor from personal liability for certain debts, is the main way this is accomplished. The discharge also prohibits creditors or collections agencies from communicating with debtors.

 

Different Types of Bankruptcy

If you were to ask an attorney, "What is bankruptcy?" you would probably be asked whether you are a business or an individual, the status of your debts, and other questions to help narrow down the definition. Truth is, bankruptcy can mean different things to different debtors. There are several types of bankruptcy provided under the U.S. Bankruptcy Code, each with its own rules and procedures:

Chapter 7

Chapter 7 Bankruptcy is titled "Liquidation" in the Code, since most of the debtor's assets are sold for cash (or "liquidated") and used to pay creditors. However, there are certain limits to which assets may be liquidated (see Bankruptcy Exemptions: Chapter 7 for more details). Chapter 7 filings where there is very little nonexempt property, if any, are called "no-asset cases." Creditors holding unsecured claims (such as credit card issuers) typically do not receive proceeds unless it is an asset case and the creditor has filed a proof of claim with the court.

Major changes to the Bankruptcy Code in 2005 included the requirement of a "means test" to determine eligibility for personal bankruptcy under Chapter 7. The test determines whether or not the debtor has too much income for this type of filing.

 

Chapter 13

Chapter 13 Bankruptcy is titled "Adjustment of Debts of an Individual with Regular Income." Unlike Chapter 7, Chapter 13 is best suited to debtors with regular income. Those who file under Chapter 13 typically are able to hold onto valuable assets, such as a house and car. Instead of liquidating assets, Chapter 13 debtors work out a plan to repay creditors over a longer period of time, usually three to five years.

The court either approves or rejects the repayment plan at a confirmation hearing, based on whether it meets requirements established by the Code. The main difference, as opposed to Chapter 7, is that the Chapter 13 filer typically remains in possession of property and makes payments to creditors through the trustee. The plan is based on the debtor's projected income over the life of the bankruptcy plan. The debtor does not receive an immediate debt discharge upon approval, but must complete payments first.

While the plan is in effect, the debtor is shielded from wage garnishments, lawsuits, and other creditor or collections actions. Additionally, debtors may be able to eliminate more debts under the Chapter 13 discharges.

​​Chapter 11

Titled "Reorganization," Chapter 11 Bankruptcy is most often used by businesses that would like to continue their operations while they repay creditors. may include a reduction in work force.

​Chapter 12

The purpose of Chapter 12, titled "Adjustment of Debts of a Family Farmer or Fisherman with Regular Annual Income," is self-explanatory.

Chapter 9

Chapter 9 is titled, "Adjustment of Debts of a Municipality" and allows cities, towns, counties, school districts, and other municipalities to declare bankruptcy. This is similar to a Chapter 11 reorganization, but applicable to a city or some other municipality instead of a business entity

Origins
Main Goal
Chapter 7
Chapter 13
The JPA File in Bankruptcy
  • JPA Policy and Procedure - Bankruptcy 

Policy Purpose:
To ensure that any action taken does not violate a Bankruptcy Stay or any Bankruptcy Court Order.

Application:
All JPA Associates.

Definitions for JPA application:

Chapter 7: In this bankruptcy, all debt except for secured debt is discharged.
Whether a borrower is able to keep a car will depend on the exemption amount allowed by their state, as well as the amount of equity in it. 

Chapter 13: Unlike a Chapter 7 where a borrower’s debts are discharged, in a Chapter 13, the debtor submits a budget and plan to the court for repaying debts owed over a period of three to five years. Advantages to the borrower include:
 

  • most creditors must stop any collection efforts against you as the result of an              order called the "automatic stay",

  • the option of surrendering the vehicle,
    catch up the arrearage thru the plan.
     

Stay: Occurs once a borrower files bankruptcy all matters are automatically stayed/stopped.

Secured Debt: Debt secured by a recorded lien, such as a car title or mortgage.

Policy Procedure:
Company will not recover collateral of a borrower who has filed bankruptcy without a bankruptcy court order allowing it and without permission of the Client. A search using PACER should be done by searching under the name, social security number, or other identifiable information. At any time, if a borrower indicates that he has filed Bankruptcy, all attempts to recover the collateral must cease.

The following information should be obtained from the customer:

1. Bankruptcy Case Number

2. The date the Bankruptcy was filed

3. Location of Bankruptcy Court where case was filed

4. The name and telephone number of the attorney handling the Bankruptcy

5. Ask to be provided a copy of the Bankruptcy filing

6. Immediately provide this information to the client

7. Await instructions from your client

Regardless of whether the debtor can, or will provide part, or all this information, JPA and the recovery agent if one assigned, must cease his attempts to take possession of the collateral until the Bankruptcy Court has granted a Relief of Stay or the Trustee has abandoned its right to the vehicle.

 

2021 Additional Info
  • 2021 Additional Information
  • IRS.gov Section 5.9.2.1  The Bankruptcy
Certification Test
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