What Does Filing Bankruptcy Mean?

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Bankruptcy is a legal procedure for dealing with the insolvency of an individual or business. An individual or business is considered insolvent when debts exceed assets and the income produced by the individual or business is no longer sufficient to maintain living or operating expenses in addition to meeting regular debt service obligations. Debtors who are insolvent may file a petition for protection with the U.S. federal bankruptcy court.


Laws dealing with the relationship between insolvent debtors and creditors date back thousands of years and are codified in the laws of such cultures as the ancient Romans and the ancient Hebrews. English bankruptcy law extends back at least as far as the 1600s, and it heavily favored the creditor. Insolvent debtors could be imprisoned or even put to death. Colonial American law derived many of its features from the English system, and though it tended to favor the claims of creditors, it was less harsh on the debtor than earlier systems. The Constitution of the United States placed the right and responsibility for creating bankruptcy laws with the U.S. Congress, and all bankruptcy cases in the United States are heard in federal court.


There are different types of bankruptcy that apply to different types of debtors. The most common types of bankruptcy for individuals include Chapter 7 bankruptcy, also known as straight bankruptcy or liquidation bankruptcy, and Chapter 13 bankruptcy, also known as the wage earner's plan, in which a repayment plan is established. The most common form of bankruptcy for businesses is Chapter 11 bankruptcy, sometimes referred to as reorganization bankruptcy. Other types of bankruptcy include Chapter 9 bankruptcy for municipalities, Chapter 12 bankruptcy for family farmers or family fishermen, and Chapter 15 bankruptcy for cases involving assets and debts located in other countries.


Individuals may file a petition for bankruptcy with the court without engaging the services of an attorney, although the U.S. federal bankruptcy court advises against it because of the complexity of bankruptcy law. The majority of individual bankruptcy cases that are dismissed involve debtors who file their petition without an attorney. Individual debtors must file their petition with the court in the appropriate bankruptcy district that has jurisdiction over the place where the debtor lives or maintains his primary place of business. Individual debtors must typically complete an approved credit counseling course prior to filing a petition for protection under Chapter 7 or Chapter 13 of the Bankruptcy Code.


Bankruptcy laws were designed to provide honest, but unfortunate, debtors a fresh financial start. Creditors typically cannot pursue any collection procedures against a debtor who has filed bankruptcy while the case is being heard in federal court. The debtor is no longer obligated to pay any debt that has been discharged by the bankruptcy court. Creditors are prohibited from pursuing any legal action against a discharged debt. The debtor's non-exempt assets may be liquidated by a court-appointed trustee with the proceeds used to satisfy the debts. A bankruptcy filing is a public legal proceeding. A report of the bankruptcy may remain on the debtor's credit report for up to 10 years.


About the Author

Mike Parker is a full-time writer, publisher and independent businessman. His background includes a career as an investments broker with such NYSE member firms as Edward Jones & Company, AG Edwards & Sons and Dean Witter. He helped launch DiscoverCard as one of the company's first merchant sales reps.

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