Legal Snapshot: A Quick Overview

How bankruptcy works. Bankruptcy begins with the filing a Petition in the Federal bankruptcy court, seeking relief under one of the various chapters of the Bankruptcy Code. As soon as the Petition is filed, the bankruptcy law imposes an automatic stay, which operates as a restraining order against the creditors. In most cases this stops bill collectors from bothering you, lawsuits, foreclosures, even the IRS, and it creates a cooling off period while the court system sorts things out. When a bankruptcy is successfully completed, the court issues a discharge. A discharge is a permanent order from the court enjoining creditors from trying ever again to collect on a debt that has been discharged.

Don’t get discouraged. This is a “simplified guide”, and we have tried to keep it that way. In the interest of presenting a basic overview, we have chosen to skip certain complex details that are still important to legal professionals and to the courts. Don’t be disappointed if you don’t always “get it.” Some of the concepts discussed in this Guide are just too complex to be explained at a basic level. The laws and regulations that govern bankruptcy law are extremely complicated. Most judges and lawyers who work outside the field of bankruptcy don’t even understand these very well.

Who files bankruptcy? Bankruptcy cases are filed by people who are drowning in debts they can’t afford to pay. There were about 2 million bankruptcy cases filed in the year 2005. If you are thinking about bankruptcy, you are not alone. Most cases are filed to discharge credit card debts, stop a foreclosure sale, auto repossessions, medical bills and unsecured credit lines. Even income taxes can be discharged under certain circumstances. Most people make financial obligations they are able to afford at the time they incur them. Later on, sometimes years afterwards, unforeseen circumstances can make debt repayment an extreme hardship if not an impossibility. Many of the people who have filed bankruptcy found themselves in a debt problem because of a job loss, divorce, or serious illness. These are some examples of the circumstances that most people could not foresee at the time they made their financial obligations.

Chapter 7 and Chapter 13. Bankruptcy cases are adjudicated in the United States Bankruptcy Court. Branches of the court are located in almost all major cities. Most individuals will generally seek relief under either of two different kinds of bankruptcy cases, called Chapter 7 and Chapter 13. In appropriate cases, Chapter 7 bankruptcy allows a person to be legally excused from repaying most kinds debts, (but there are certain exceptions.) Chapter 13 is generally described as Reorganization, where a person pays some or all of their debts under a structured payment plan carried out under court protection and supervision.

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