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What is Bankruptcy?

Bankruptcy is government supervised debt relief.

If you qualify for bankruptcy, your debts are normally reduced or eliminated.

Below is an explanation of four types of bankruptcy relief that may be available to you:

Chapter 7 Bankruptcy 

Most types of debts are fully dischargeable (100% forgiven) under Chapter 7.  Nevertheless, certain types of debts are not dischargeable (forgiven).  Student loans, taxes, support and certain other debts are usually not dischargeable in Chapter bankruptcy.  Also secured debts, like, for example, home or car loans, receive special treatment under bankruptcy law. 

Chapter 7 of the Bankruptcy Code provides for "liquidation," i.e., the sale of a debtor's nonexempt (legally unprotected) property.  The liquidation proceeds are then distributed to creditors.  However, in most Chapter 7 bankruptcy cases, no assets or property are liquidated. 

The idea behind a Chapter 7 bankruptcy is to give persons a “fresh start,” not a “head start.”  Accordingly, courts will generally dismiss a Chapter 7 bankruptcy if the Court finds the debtor committed “substantial abuse” of the bankruptcy system by filing an unnecessary Chapter 7 bankruptcy.

Moreover, thanks to intense lobbying efforts by the major credit card banks (i.e., paying large sums of money to Congressmen), Congress passed new, more stringent bankruptcy laws.  

Under the new law, to qualify for Chapter 7 bankruptcy relief, you must (with exceptions) overcome a Median Income Test.  If you don’t overcome the Median Income Test, you must then overcome the Means Test.  But even if you overcome the Median Income and the Mean’s Test, you must also nearly always overcome the "totality of the circumstances" (excess disposable income) test.  However, despite the new laws with all of their obstacles and red tape, a substantial majority of people who would have qualified for Chapter 7 bankruptcy under the old law will still qualify for Chapter 7 under the new law.

Chapter 11 Bankruptcy

This is a reorganization bankruptcy.  It usually involves a corporation or partnership. A Chapter 11 debtor usually proposes a plan of reorganization to keep its business alive and pay creditors all or part of what is owed over a period of time. People in business or individuals can also seek relief in Chapter 11.

Chapter 12 Bankruptcy

This chapter of the Bankruptcy Code provides for adjustment of debts of a "family farmer," as that term is defined in the Bankruptcy Code.

Chapter 13 Bankruptcy

This chapter of the Bankruptcy Code provides for adjustment of debts of an individual with regular income. Chapter 13 allows a debtor to keep property and pay all or part of his or her debts over time, usually three to five years. 

Clean Hands

A guiding principle of U.S. bankruptcy law requires persons who file for bankruptcy to have "clean hands."  Accordingly, if a creditor takes timely action, a debtor may not be freed from debts involving fraud, drunk driving, and deliberate wrongdoing.

A Partial History of Bankruptcy Law.

Bankruptcy contemplates the "forgiveness" of debt.  Possibly, the earliest origins of bankruptcy are found in Bible.

"At the end of every seven years you shall grant a release of debts.  And this is the form of the release: Every creditor who has lent anything to his neighbor shall release it; he shall not require it of his neighbor or his brother, because it is called the LORD's release." 

Deuteronomy 15:1-2

See also Is Bankruptcy Scriptural?  What Does The Bible Say?

In the United States of America, our founding fathers recognized the importance of bankruptcy.  In the U.S. Constitution, they provided our government with the right to make bankruptcy laws. The bankruptcy laws and procedures we have today, instituted by our federal government, provide relief for overburdened debtors.  Persons/entities who are over-their-head in debt can get a fresh start. 

On average, over one million people per year file for bankruptcy relief.

If you are struggling and juggling to pay your debts, learn out about your bankruptcy options by contacting attorney Matthew B. Tozer for a free, private and confidential telephone or office consultation.

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