Bankruptcy has been part of U.S. law ever since the founding fathers wrote the Constitution in the 1700s. They got the idea from British common law which had allowed for personal bankruptcies for hundreds of years. While our founding fathers didn't think it a wise idea to promote bankruptcy as a solution to financial problems, they nonetheless knew that it was a necessary evil to be included in the law of the land. In this country, the Constitution gives authority over bankruptcy to the U.S. Congress.
Because bankruptcy in the United States is the domain of the Congress, it is a federal district court which handles the proceedings. These federal courts exercise all jurisdiction over a petition, from start to finish. However, federal law is vague in many respects to the extent that it cannot possibly deal with every scenario that may arise during a bankruptcy proceeding. Therefore, state law has been written to fill in the gaps. While bankruptcy proceedings are fairly similar all across the land, there may be some differences from one state to the next.
Regardless of differing state regulations one thing is sure: you will always file a petition in a federal court and appear before a federally appointed judge. You can find the court clerk in your region by contacting your state's federal district court office. You can also find information on the Internet or look for bankruptcy attorneys in your area.
The Bankruptcy Process
The actual process for filing bankruptcy is fairly simple. It is a four step process which involves:
- consulting with an attorney.
- determining which chapter to file under.
- putting together your paperwork.
- filing the petition with the court.
Although the process for filing personal bankruptcy is quite simple, the paperwork is not necessarily so. For this reason federal courts try to discourage individuals from filing bankruptcy without the help of an attorney. Furthermore, most judges would prefer to see you represented in their courtrooms with an attorney at your side. If there is even the slightest mistake on your paperwork a court may choose to dismiss your case. If that happens, you may not be eligible to reapply for a period of time that could be several months to a couple of years.
Determining Your Chapter
There are six different types of bankruptcy available, each one taking its name from a chapter of the federal code. The three most common forms are Chapter 7, chapter 13, and Chapter 11. A Chapter 11 bankruptcy is a reorganization plan primarily used by corporations, limited liability corporations, and partnerships. Although businesses organized as a sole proprietorship could go with Chapter 11, it is a rare to see that done. In a Chapter 11 filing, only the business and its assets are in play; officers and employees are not liable.
A Chapter 13 bankruptcy is also a reorganization plan used by small businesses and sole proprietorships. More often than not it is for sole proprietors who are trying to protect their personal assets from seizure. However, any individual can choose this chapter if he can demonstrate sufficient income to pay off his debts within 3 to 5 years. Sufficient income however, is the key. You must prove to the court that you have enough disposable income above and beyond what's needed for your daily bills. That disposable income will go towards paying off your debts.
Chapter 7 is the most popular filing for individuals because it allows for a fast and clean break. It is known as a liquidation. Under this chapter you will allow the court to seize and sell all of your qualifying assets in order to pay off your debts. Though this is a drastic move, the upside is that any dischargeable debts that remain after the proceeding is over will be automatically wiped out.
Putting Together the Paperwork
One of the reasons you might want to hire an attorney lies in the fact that putting together the paperwork can be complicated. In a Chapter 11 or 13 petition, you'll have to file a detailed and comprehensive plan explaining how you will pay off your debts. In a Chapter 7 filing you'll have to include a full list of all assets to the court. In all three filings, there is additional paperwork that must be filled out accurately. Only when you have all of your paperwork in order will you be allowed to file your petition.
Furthermore, for individuals filing under Chapter 7 or Chapter 13, federal law requires that they seek consumer credit counseling services prior to filing bankruptcy. If this is you, you will be required to obtain counseling from an accredited agency which will then provide you with a certificate of proof. That certificate must be included with your petition or the court clerk will not accept it. In some states, you must also submit to debt consolidation services before applying for bankruptcy. If that's the case in your state, you will also receive certification from the agency you have worked with.