Bankruptcy laws help people who can no longer pay their creditors obtain a fresh start through the division of assets to pay their debts or by development of a repayment plan. Bankruptcy laws also protect troubled businesses and take care of systematic distributions to business creditors by reorganization or liquidation. This supervised division permits the interests of all creditors to be handled with fairness, as well. The purpose of bankruptcy law is to allow certain debtors to free themselves of the financial obligations they have accumulated, after their assets are distributed, even if their debts have not been paid in full.

Federal courts have exclusive jurisdiction over bankruptcy cases. This means that a bankruptcy case cannot be filed in a state court. The recent changes to the Bankruptcy Prevention and Consumer Protection Act in April 2005 has caused major reforms in bankruptcy law, defining amended guidelines regulating the discharge or conversion of Chapter 7 liquidations to Chapter 11 or 13 proceedings. The law requires all debtors to get credit counseling before they can file a bankruptcy case and additional counseling on budgeting and debt management before their debts can be wiped out. The United States Trustees Program responsibilities are also expanded to take in administration of random and targeted audits, as well as better supervision of small business Chapter 11 reorganization cases.

What are the different types of bankruptcy?

There are six different types of bankruptcy, each known by the chapter in the Bankruptcy Code in which it is located. While they vary in structure and procedure, they all provide for permanent relief from certain debts.

Chapter 7 provides for insolvency of the debtor’s non-exempt assets. Bankruptcy may exempt certain assets, such as a home or car. A court-appointed trustee conducts the sale of debtor’s non-exempt assets and distributes the proceeds to creditors. Both individuals and businesses may file for bankruptcy under this chapter.

Chapter 9 provides for the reorganization of municipalities, which includes cities, towns, villages, taxing districts, municipal utilities, and school districts.

Chapter 11 provides for a supervised reorganization of a business, and allows the debtor to maintain the business while implementing a payment plan confirmed by the court.

Chapter 12 contains bankruptcy provisions applicable to family farmers and fisherman.

Chapter 13 provides for bankruptcy of an individual with a regular income, which is used to make a payment plan to pay debts, usually within three to five years.

Chapter 15 applies to cross-border bankruptcies. It adopts and implements the United Nations’ Model Law on Cross Border Insolvency.