Bankruptcy is a combination of federal laws and guidelines that can help individuals and organizations who owe more debt than they can pay. Each of the 94 federal judicial districts handles bankruptcy matters, and in almost all districts, bankruptcy cases are filed in the bankruptcy court. Bankruptcy cases cannot be filed in state court. By selling off their assets to pay off their debts or by coming up with a repayment plan, people who are unable to pay their creditors can get a fresh start thanks to bankruptcy laws.
Bankruptcy laws also protect troubled businesses and provide for orderly distributions to business creditors through reorganization or liquidation. These procedures are covered under Title 11 of the United States Code (the Bankruptcy Code) (the Bankruptcy Code). The three primary provisions of the Bankruptcy Code—Chapters 7, 11, and 13—are used in the great majority of cases.
Federal courts have sole jurisdiction over bankruptcy cases. This means that a bankruptcy case cannot be filed in a state court.
While some bankruptcy cases involve the liquidation of the debtor’s assets, others are filed to allow the debtor to reorganize and create a plan to repay creditors.
A bankruptcy case generally begins by the debtor filing a petition with the bankruptcy court. A petition may be filed by an individual, by a husband and wife together, or by a corporation or other entity. The debtor is also required to file statements listing assets, income, liabilities, and the names and addresses of all creditors and how much they are owed. The filing of the petition automatically prevents, or “stays,” debt collection actions against the debtor and the debtor’s property. Creditors are prohibited from filing or continuing litigation, levying wages, or even making phone calls seeking payment while the stay is in place.
Creditors receive notice from the clerk of court that the debtor has filed a bankruptcy petition. While some bankruptcy cases involve the liquidation of the debtor’s assets, others are filed to allow the debtor to reorganize and create a plan to repay creditors. In many bankruptcy cases involving liquidation of the property of individual consumers, there is little or no money available from the debtor’s estate to pay creditors. As a result, in these cases there are few issues or disputes, and the debtor is normally granted a “discharge” of most debts without objection. Thus, the debtor will no longer be held personally responsible for paying back the obligations.