US bankruptcy
When the value of debtor's assets is less than the outstanding debts, and the debtor is unable to pay regular financial obligations out of income, then the debtor is said to be insolvent or bankrupt.
Bankruptcy filings
Chapter 7, 9, 11, 12 and 13 of U.S. Bankruptcy Reform Act of 1978 deals mainly with bankruptcy filings of individuals, firms, business enterprises, family farmers/fishers, and municipalities. Bankruptcy filings under Chapter 11 to 13 involve reorganization and restructuring of assets as well as loans.
Creation of an estate:
Almost immediately on filing bankruptcy petition with U.S. Bankruptcy Courts, the concept of creation of estate comes into force. It is the net value of all assets of the debtor less any non-permissible debts, like alimony, child support, taxes, student loans, etc., value of any exempt properties, beneficial interests in any spendthrift trusts, etc.
Value of any estate inherited by the debtor within 180 days of bankruptcy filing, under whichever chapter, is added to this estate for purpose of distribution to the creditor.
Exempt properties:
Values of properties like clothing, household articles, tools of trade, etc., will contribute very little to the overall sum that is to be distributed to creditors. Therefore, such items are generally exempted from the term estate. By virtue of provisions in the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, even those retirement plans that are not covered by Employee Retirement Income Security Act of 1974, are now to be deducted from the estate of debtor.
Spendthrift trusts
Any beneficial interest of debtor in a trust may not be included in estate, if the laws of the state so permit. However, such beneficial interest must be acquired by the debtor without any contribution to the trust.
Automatic stay:
An automatic stay comes into force once a debtor files for bankruptcy under any of the above-mentioned chapters. This stay is by virtue of provisions in Bankruptcy code no.362. It stops the creditors from attempting to collect the debts directly from the debtor. This also prevents the creditors from filing any case against the debtor for improving chances of recovery.
The court may, however, grant some relief to secured creditors.
Jurisdiction:
Courts:
The relevant applications need to be filed with U.S. Bankruptcy court, procedures of which are governed by federal laws. These courts are units of U.S. District Courts. These district courts can again refer the matter to Bankruptcy courts. Any decision at Bankruptcy court level can be appealed in District Courts. And any decision at District Court can be appealed at Court of Appeals.
Trustee:
United States Attorney General appoints and supervises United States Trustees. One such trustee is appointed for each of 21 geographical divisions of the country. The term of office of these trustees is 5 years. Trustees of regional office are thus administered by Executive Office for United States Trustees, at Washington D.C. Such trustees are officers of United States Department of Justice. There is a panel of private trustees under each of these trustees. These private trustees are appointed as ?trustees? in bankruptcy proceedings under the above mentioned chapters. Their duty in case of Chapter 7 filings is to ensure fair distribution of liquidation proceeds. In case of other applications, these private trustees are also responsible for monitoring reorganization and restructuring schemes.
Creditors:
Creditors are first divided into two categories ; the secured creditors and the unsecured creditors. Interests of secured creditors are safeguarded first. That is proceeds from any liquidation of assets are first appropriated towards the secured loans. The remaining is distributed amongst the unsecured creditors.
Unsecured creditors are again divided into priority creditors and other general creditors. If the proceeds on any liquidation are inadequate to meet the debts of priority creditors, other general creditors get nothing. If, however, after clearing these priority creditors, some amounts remain, then these proceeds are given as per ranks given to the creditors.
Creditors have an obligation to substantiate their claims before the trustee.
Redemption:
A debtor who has filed for bankruptcy under Chapter 7, can sell his interests in exempt properties or other assets that are excluded from the purview of estate, even if they are under any lien, provided, the lienholder?s interests are cleared in full from the proceeds.
Discharge of debtor
This is the step that concludes the bankruptcy filing. Once the debts are cleared to the extent possible, the debtor is discharged from his previous dues. This discharge is not applicable to partnerships, corporations, etc.
The discharge also keeps in force the secured debt to the extent it is covered by the collateral. That is if the secured debt is valued at $50,000 and the collateral is likely to fetch $40,000. Then, the debt is alive to the extent of $40,000, notwithstanding such bankruptcy proceedings and debtor?s discharge.
Sometimes the collateral increases in value. In such cases, creditor may or may not be entitled to claim the entire value, based on the terms in contract. Debts like taxes, alimony, and student loans cannot be discharged, i.e., the debtor continues to remain liable for them, even after receiving discharge letter from trustee.
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