BANKRUPTCY EDUCATION CENTER WHAT BANKRUPTCY IS AND WHAT BANKRUPTCY CAN DO FOR YOU
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What is bankruptcy?
A voluntary (meaning someone, be it person or company chooses to file a bankruptcy petition, there is such a thing as an involuntary petition, but it's unusual) bankruptcy case is a legal proceeding, brought by a debtor, that seeks relief specifically provided for by a federal statute (a law written by Congress), the Bankruptcy Code. The bankruptcy is not an idea that congress just came up with, it's actually specifically identified in the U.S. Constitution, see Article I Section 8 Clause 4.
A bankruptcy case starts by filing, that is, papers and sending them in, to the correct U.S. District Court, which has jurisdiction (the authority, under the constitution to decide) over all bankruptcy cases, but because it's a very specialized area of the law, most District Courts have established specialized bankruptcy courts, like the bankruptcy court here in the district of New Jersey. So the actual bankruptcy petition is usually filed with the bankruptcy court, a division of the district court.
What does bankruptcy accomplish?
For individuals, there are two types of things that bankruptcy can accomplish, depending on what sort of bankruptcy is filed. that are usually used. The first is under chapter 7 of the Code. In a Chapter 7 case, sometimes referred to as a straight bankruptcy, any substantial (high value) nonexempt assets of the debtor (the person or company who filed the case, generally)are converted to cash (by selling it) and the money distributed to creditors according to certain rules. The debtor ordinarily gets a discharge from the court in an order, which absolves him or her from any responsibility to pay most debts and also provides some other protections from creditors and government agencies.
The second thing bankruptcy can accomplish, in a different sort of bankruptcy, called a Chapter 13 bankruptcy or Chapter 11 bankruptcy (these are two different sorts of bankruptcy, but they are meant to accomplish the same goals)or adjustment, of debts. In a chapter 13 case, the debtor proposes a plan to pay some or all of their debts, the bankruptcy code lays out how this happens, and who gets paid what. The payment plan is then carried out with the court protecting the debtor from creditors trying to get more than the plan calls for them to receive. At the end of the case, as like a chapter 7 case, the debtor gets a discharge from personal liability on most debts, as well as other protections.