Bankruptcy Basics

What is Bankruptcy?

The origin of the word “bankruptcy” is derived from the French word, banquerote,meaning “broken bench,” and refers to a time in the middle ages when a merchant lost his trading bench in the marketplace as a penalty for not paying debts. In those bygone days bankruptcy served as punishment for the business transgressions of merchants and tradespeople. Today, the laws are more complex, serving to grant honest debtors a fresh start – not to punish for misdeeds. The bankruptcy laws are often thought of as public benefit or “safety net” laws which protect people who have suffered a financial disaster, are in need of help to become productive members of society again.

In the United States, the main laws governing bankruptcy proceedings are federal statutes known as the Bankruptcy Code. Even though the “Code” is a federal law, there can be significant differences from state to state for certain aspects of the law, such as property exemptions or procedural requirements.

Basic Bankruptcy Concepts

Certain basic concepts apply under both Chapter 7 and Chapter 13. Bankruptcy proceedings are commenced by filing a petition with the bankruptcy court. The petition lists all of your assets, liabilities and other financial and personal information required under the law. You cannot pick and choose which creditors to include on the petition, as all creditors must be listed.

In most cases you can keep your home and vehicles.

You may file as an individual, or jointly as husband and wife. Married couples, however, do not have to file jointly if substantially all debts are solely in one spouse’s name. The filing of the petition invokes the “automatic stay.” This means that your creditors are immediately prevented from doing anything to compel collection of a debt. The harassing calls, garnishments, law suits, foreclosures, repossessions or shutting off of utility services are all stopped immediately.

In the petition, your debts are classified as either priority, secured or unsecured. Each is treated differently depending on which chapter is filed. Priority debts in consumer cases are usually limited to government tax liabilities and support obligations. Priority creditors have certain rights to payment over other creditors.

Secured debts are backed by property pledged as collateral, and typically consist of vehicle loans and mortgages. The creditor has a lien, or right to recover the property upon default. You can keep secured collateral as long as you agree to keep paying on the loan after bankruptcy.

Unsecured debts are almost every other type of debt not backed by collateral. They include credit cards, utilities, medical bills, store charges and unsecured personal loans. Unsecured creditors do not have a lien or collateral interest in any of your property. In most bankruptcy cases the unsecured debt will be fully or partially erased.

If you are considering bankruptcy, there are a couple of things you should not do. First, you should not give away money or any valuable property to try and protect those assets before filing a bankruptcy. There are laws that allow those transferred assets to be recovered for the benefit of your creditors. Failure to disclose the transfer would be bankruptcy fraud. Also, you are not allowed to re-pay more than $600 you owe to a relative within one year prior to the bankruptcy filing. This is called a “preference,” and the bankruptcy court can force your relative to turn the money back over to a trustee so it can be distributed equally among your creditors. On the other hand, you are free to repay relatives what you owe them after the filing if you choose. For more information about these and other matters you should consult with a qualified bankruptcy lawyer.