A BRIEF HISTORY OF BANKRUPTCY AND HOW IT WORKS
Article I, Section 8, of the United States Constitution authorizes Congress to enact "uniform Laws on the subject of Bankruptcies." Under this authority, Congress has enacted numerous bankruptcy laws since 1800, including the "Bankruptcy Code" in 1978. The present Bankruptcy Code is the uniform law governing all bankruptcy cases in the United States.A fundamental goal of the bankruptcy laws is to give debtors a financial "fresh start" from burdensome debts. The Supreme Court made this point about the purpose of the bankruptcy law in a 1934 decision:[I]t 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 pre-existing debt.Local Loan Co. v. Hunt, 292 U.S. 234, 244 (1934).
This goal is accomplished through the bankruptcy discharge, which releases debtors from personal liability from specific debts and prohibits creditors from ever taking any action against the debtor to collect those debts. The court official with decision-making power over Federal bankruptcy cases is the United States Bankruptcy Judge, a judicial officer of the United States District Court. The Bankruptcy Judge may decide any matter connected with a bankruptcy case, such as eligibility to file or whether a debtor should receive a discharge of debts. Much of the bankruptcy process is administrative, however, and is conducted away from the courthouse. In cases under Chapters 7, 12, or 13, and sometimes in Chapter 11 cases, this administrative process is carried out by a trustee who is appointed to oversee each bankruptcy case.A debtor's involvement with the bankruptcy judge usually is very limited. A typical Chapter 7 debtor will not appear in court and will not see the Bankruptcy Judge unless an issue arises in an individual case. A Chapter 13 debtor may only have to appear before the Bankruptcy Judge at a plan confirmation hearing. In most cases, the only formal proceeding at which a debtor must appear is the meeting of creditors, which is usually held at the office of the United States Trustee. This meeting informally is called a "341 meeting" because §341 of the Bankruptcy Code requires that the debtor attend this meeting so that creditors can question the debtor about debts and property.INFORMATION ABOUT THE DIFFERENT CHAPTERS OF BANKRUPTCY
The Bankruptcy Code allows individual consumer debtors to file four basic types of bankruptcy cases. The cases traditionally are given the names of the chapters that describe them:Chapter 7 contemplates an orderly, court-supervised procedure by which a trustee takes over any non-exempt assets of the debtor's estate, reduces them to cash, and makes distributions to unsecured creditors, subject to the debtor's right to retain certain exempt property and the rights of secured creditors to get paid by the debtor the collateral the debtor intends to keep. Because most property is exempt under Illinois law, there may not be an actual liquidation of the debtor's assets. These cases are called "no-asset cases" and most Chapter 7 cases are no-asset cases.
A creditor holding an unsecured claim will get a distribution from the bankruptcy estate only if the case is an asset case and the creditor files a proof of claim with the bankruptcy court. In most Chapter 7 cases, if the debtor is an individual, he or she receives a discharge that releases him or her from personal liability for certain dischargeable debts. The debtor normally receives a discharge just a few months after the petition is filed. Amendments to the Bankruptcy Code enacted in to the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 require the application of a "means test" to determine whether individual consumer debtors qualify for relief under Chapter 7. If such a debtor's income is in excess of certain thresholds, that debtor may not be eligible for Chapter 7 relief and would have to file a Chapter 13 case.
Chapter 13 is designed for an individual debtor who has a regular source of income. Chapter 13 is often preferable to Chapter 7 because it enables the debtor to keep a valuable asset, such as a house in mortgage foreclosure or a car on which the payments are delinquent, and because it allows the debtor to propose a "plan" to repay creditors over time - usually three to five years. Chapter 13 is also used by consumer debtors who do not qualify for Chapter 7 relief under the means test because of too much household income. At a confirmation hearing, the court either approves or disapproves the debtor's repayment plan, depending on whether it meets the Bankruptcy Code's requirements for confirmation.
Chapter 13 is very different from Chapter 7 since the Chapter 13 debtor usually remains in possession of the non-exempt assets of the estate and makes payments to creditors, through the trustee, based on the debtor's anticipated income over the life of the plan. Unlike Chapter 7, the debtor does not receive an immediate discharge of debts. The debtor must complete the payments required under the plan before the discharge is received. The debtor is protected from lawsuits, garnishments, and other creditor actions while the plan is in effect. The discharge is also somewhat broader, i.e., more debts are eliminated, under Chapter 13 than the discharge under Chapter 7.
Chapter 11 ordinarily is used by businesses and corporations, such as K-Mart and United Airlines that desire to continue operating a business and repay creditors concurrently through a court-approved plan of reorganization. However, an individual who owes more than $1 million is eligible to file a Chapter 11 case.
Chapter 11 ordinarily is used by businesses and corporations, such as K-Mart and United Airlines that desire to continue operating a business and repay creditors concurrently through a court-approved plan of reorganization. However, an individual who owes more than $1 million is eligible to file a Chapter 11 case.
Chapter 12 provides debt relief to family farmers and fishermen with regular income. The process of Chapter 12 is very similar to Chapter 13, under which the debtor proposes a plan to repay debts over a period of time - no more than three years unless the court approves a longer period, not exceeding five years. There also is a trustee in every Chapter 12 case whose duties are very similar to those of a Chapter 13 trustee. The Chapter 12 trustee's disbursement of payments to creditors under a confirmed plan parallels the procedure under Chapter 13. Chapter 12 also allows a family farmer or fisherman to continue to operate the business while the plan is being carried out.
THE METRO EAST BANKRUPTCY LAWYERS
Lathram & Herbert, LLP
We're "The Good Guys"
203 West Main Street
Collinsville, Illinois 62234
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It doesn't matter where you live in the Metro East area - Alton, Belleville, Collinsville, Columbia, East St. Louis, Edwardsville, Fairview Heights, Freeburg, Granite City, Highland, Lebanon, Mascoutah, O'Fallon, Pontoon Beach, Scott Air Force Base, Shiloh, Swansea, Trenton, Troy, Waterloo, Wood River - we'll help you regain control of your financial life. So, why wait any longer? Your fresh start is just a telephone call away.
