What Does It Mean to File for Bankruptcy?
There’s a lot of news surrounding bankruptcy. With the upcoming elections, will student loans be dischargeable in bankruptcy? Other news shows that bankruptcy filings are down in 2020 compared to 2019. Still other articles suggest that people often look at bankruptcy as an option of last resort, and file for bankruptcy when it’s too late. A good starting question, though, is: what does it mean to file for bankruptcy?
Bankruptcy is a type of legal proceeding used by parties that can’t afford to pay their debts. The party that files for bankruptcy is known as the debtor. A party that may have a claim against the debtor is known as a creditor. While this equation is simple, the totality of bankruptcy is much more complicated. So it’s good to ask and answer the question: what does it mean to file for bankruptcy?
Where Do Bankruptcy Cases Come From?
The source of bankruptcy law is found in the United States Constitution – Article 1, Section 8 – which authorizes the United States Congress to establish uniform bankruptcy laws. As a result, the statutes that make up the “Bankruptcy Code” are found in federal law – the United States Code. More specifically, the Bankruptcy Code is found in Title 11 of the United States Code. (If you ever see a reference to a specific bankruptcy law, you’ll see that it’s labeled 11 USC Sec. 101 or whatever section number.)
While the Bankruptcy Code contains most of the laws that relate to bankruptcy, most states have some laws that are involved with bankruptcy cases, especially laws around what property is exempt from bankruptcy cases. So, in each bankruptcy case, there is an interplay between federal and state law.
Why Do People File For Bankruptcy?
As mentioned before, people (or companies) file for bankruptcy when they can’t pay their debts. The idea behind bankruptcy protection is that not paying your debts SHOULD NOT be a criminal offense, but also that a party should not be able to escape liability on a debt yet still keep lots of property. Bankruptcy cases are a push and pull between enforcing a creditor’s right – a right that was bargained for when the debtor took on the debt – and an honest but unfortunate debtor’s ability to get a fresh start in life.
More practically, people often file for bankruptcy when they can’t afford to maintain a minimal standard of living as a result of their debts. Often, people that are thinking about filing for bankruptcy have suffered some event that has caused a decrease in assets or income. It could be a medical issue, separation or divorce, having a new child, loss of employment. When one or more of these things happen, people have to choose between keeping a roof over their head and food on their table versus paying their debts.
How Do You File For Bankruptcy?
A bankruptcy case starts by filing a bankruptcy petition in the bankruptcy court. This petition is the main document that starts the case. The official form is used in each and every bankruptcy case that is filed. In addition to the petition, there is a filing fee that must be paid to the court, and a credit counseling certificate to be filed for individual debtors. Still further (since bankruptcy courts differ from each other in procedure), there may be other documents that you must file to start your case.
In addition to the petition and credit counseling certificate, there are schedules that have to be filled out and filed in each case. It’s in these schedules where a debtor will list and disclose their property, their different debts, the names and addresses of creditors, their income, their expenses, and a host of other information.
What Happens When A Bankruptcy Case Is Filed?
As soon as a bankruptcy case is filed, unless there are special circumstances like a repeat filer, an Order for Relief, known as the Automatic Stay, goes into effect. This means that a creditor must cease all activities to enforce and collect a debt. This could be a lawsuit, a wage garnishment, a foreclosure, or a repossession.
If a creditor believes the automatic stay does not apply to them, they should generally file a motion for relief from stay in the bankruptcy case.
Shortly after a case is filed, a trustee is appointed to administer the bankruptcy estate. The role of the trustee is to collect all of your property that is not exempt (protected by law) and liquidate to pay off unsecured creditors. Think of the trustee as stepping into your shoes, owning all the things that you own. You are allowed to keep what is protected under the law, and the trustee can sell everything else to pay off the unsecured creditors.
This is not to say that trustees will seek to leave you with the absolute bare minimum. Trustees also take into account the cost that would be involved in liquidating and selling things. So only if it makes sense to marshal and liquidate an asset will a trustee generally seek to do so. Property that trustees will generally find easier to liquidate include cash, bank accounts, tax returns, cars, businesses, and jewelry.
What Is A Bankruptcy Discharge?
After your bankruptcy estate is administered, a judge will enter an Order of Bankruptcy Discharge. This DOES NOT mean that your debts have been wiped out to zero. What the bankruptcy discharge means is that the creditors that you had on the date you the automatic stay went into effect are PRECLUDED and PROHIBITED from attempting to enforce or collect on those debts.
(For example, if you owed a credit card company $1,000 that was discharged in bankruptcy. The discharge does not mean that the $1,000 must be reduced to zero; the discharge means that the credit card company cannot take any action to enforce or collect that $1,000 – but they can keep track of the debt as you owing it to them.)
When Should You File For Bankruptcy?
There is no clear time for someone to file for bankruptcy. While many people look to file bankruptcy when more damage has been done than needs to have happened, it’s probably a good idea to speak with a bankruptcy attorney as early in the process as possible. In this way, you can plan for it, and hopefully avoid lots of stress. If you would like to discuss bankruptcy for you or someone you know, then I encourage you to contact the Law Office of Richard Kistnen by calling (718) 738-2324, emailing [email protected], or scheduling a virtual appointment.
A lot happens when a party files for bankruptcy, so it’s important to understand: what does it mean to file for bankruptcy? The power of bankruptcy is found in federal law, with lots of state law being involved. When a bankruptcy case is filed, the automatic stay goes into effect. A. trustee is appointed to administer the bankruptcy estate. After the estate is administered, a discharge order is entered that prohibits creditors from attempting to collect or enforce a debt.
If you would like to discuss bankruptcy for you or someone you know, then I encourage you to contact the Law Office of Richard Kistnen by calling (718) 738-2324, emailing [email protected], or scheduling a virtual appointment.