The term Bankruptcy means the legally declared inability of an individual or an organization to pay their credits. Involuntary bankruptcy is the situation in which the creditor may file a bankruptcy petition against a debtor to recover a portion of the amount dues him. Generally in a majority of cases, bankruptcy is initiated by the debtor known as “voluntary bankruptcy”. Bankruptcy in the United States is placed under ‘Federal jurisdiction” by the United States Constitution that enacts “uniform laws on the subject of bankruptcies throughout the United States’.

Bankruptcy cases are always filed in the U.S.bankruptcy court-an adjunct to U.S. District court. Bankruptcy cases with respect to validity of claims and exemptions are highly dependent upon State laws and therefore in many bankruptcy cases, it is often impossible to generalize bankruptcy laws across state lines.

There are six types of bankruptcy under Bankruptcy Code of the U.S code.

Chapter 7: Basic liquidation for individuals and business.

Chapter 9: Municipal bankruptcy.

Chapter 11: Rehabilitation by business debtors and also by individuals with extensive debts and assets.

Chapter 12: Rehabilitation for family farmers and fishermen.

Chapter 13: Rehabilitation for individuals with a regular source of income.

Chapter 15: Ancillary and other international cases.

The most common types of personal bankruptcy for individuals are chapter 7 and chapter 13. In chapter 7, a debtor surrenders his or her non-exempt property to a bankruptcy trustee who liquidates the property and distributes the proceeds to the debtor’s creditors. In exchange for this, the debtor is entitled to a discharge from debt unless the debtor is not guilty of certain types of inappropriate behavior like hiding records concerning financial conditions. Many individuals who are bankrupt own only exempt property. The exempt amount varies from state to state. Chapter 7 relief is available only once in any 8 year period.

In chapter 13, the debtor retains ownership and possession of all his or her assets but must devote a part of his or her future income to creditors over a period of 3 to 5 years. The amount and period vary depending upon the value of debtor’s property and the amount of debtor’s income and expenses. Secured creditors are entitled to greater payment than unsecured creditors.

There are many types of proceedings that fit under bankruptcy. Chapter 7 liquidation involves the appointment of a trustee who collects the nonexempt properties of the debtor, sells them and distributes the ties proceeds to the creditors.

Chapter 9 is a form of bankruptcy available only to municipalities.

Chapter 11 involves allowing the debtor to keep a portion of his or her property and use the future earnings to pay off creditors.

Chapter 12 is similar to chapter 13 but available only to family farmers and family fishermen in certain situations.

Chapter 15 deals with foreign companies with U.S.debts.

Bankruptcy crimes: Bankruptcy fraud is filing a bankruptcy petition in a bankruptcy case to attempt to execute or conceal a scheme or pretense to defraud. Bankruptcy fraud also means making fraudulent representation claim or response in connection with a bankruptcy case. Bankruptcy fraud is punishable by a fine or by up to 5-year imprisonment or both. Bankruptcy crimes are prosecuted by the United States attorney after a reference from the U.S trustee.

Banks and other deposit institutions, insurance companies, railroads and certain other financial institutions regulated by the federal and state governments cannot be a debtor under the bankruptcy code. Instead, special state and federal laws govern the liquidation of these companies. It is erroneous to refer to a bank or insurer as being “bankrupt’. “Insolvent”, “in liquidation” or “in receivership” would be fitting under some circumstances in the U.S context at least.



Thanks to Lesley Lyon for contributing this article to our Bankruptcy blog:

Filing Corporate Bankruptcy

As debt settlements, bankruptcies, and the unpopularity of credit card companying continue to increase, the Obama administration reiterated its support behind legislation in Congress that would put restrictions on the imposition of higher fees and interest rates on consumers. Following on promises made during his campaign, President Obama met with top brass from the largest credit card issuers in the country to push them toward action that would reduce abusive practices. 

The meeting at the White House occurred as the House of Representatives worked to finalize new curbs on credit card fees. In addition to the curbs, senior White House officials pressed for a provision that forces require credit card companies to prioritize payments so that the first money to come in from a consumer is applied to debt carrying the highest interest rate.

In a separate action on Wednesday the House Financial Services committee passed a bill that would decrease and/or limit a variety of fees and penalties currently being charged by credit card companies. The bill was sponsored by Rep. Barney Frank, D-Mass., and Rep. Carolyn B. Maloney, D-N.Y    

The bill could reach the floor of the House where hopes are that it will fare better than a similar bill passed by the Senate Banking Committee three weeks ago. That bill barely passed with all Republicans on the committee in opposition. Pressed by credit card industry lobbyists, Senate Republicans will attempt to block that bill but public sentiment and pressure from the White House are likely to influence its passage. 

Senate Republicans, industry executives, and lobbyists contend that passage of these bills is redundant due to the fact that the Federal Reserve has already adopted a series of similar restrictions that will go into effect next year. Another of the group’s contentions is that the passing of the legislation could further reduce lending in the face of tighter credit card company restrictions and the inability of consumers to obtain financing through other means. In reality, it could be that real agenda is to delay the inevitable to allow for fees and high rates addressed in the bill to be charged for as long as possible.

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Thanks to Debt Settle Inc for contributing this article to our Bankruptcy blog:

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Can you answer Mark’s Mine’s question about Bankruptcy?:

What is considered by consumers to be the best non for profit credit counseling firm?

Getting A Loan After Bankruptcy

Can you answer dwaindaddy’s question about Bankruptcy?:

I am thinking about allowing a credit counseling service (Take Charge America) to consolidate all my unsecured credit. Will this help or hurt my credit rating once I complete the program in about 3.5 years?

How To Declare Bankruptcy

Credit counseling is the process by which consumers are made aware of the consequences that they may face should they mismanage their finances. The main objective of credit counseling is to help out consumers get out of debt through reduced rate of interest and careful budgeting. Rate of interest is reduced by negotiating with the creditors.

Credit counseling is offered by companies as an efficient tool for financial planning. An efficient credit counselor will assess the current financial situation of a debtor and work out for the best possible solution for debt reduction.

The following instances may drive you to opt for credit counseling-

It has been observed in majority of the cases that under the following circumstances, consumers choose a credit counseling session.



A debtor has decided to file for bankruptcy and wants to give it a last try to repair his financial condition.

If a debtor has fallen behind by a couple of payments and is seeking a way to regularize them can opt for credit counseling.

If a debtor has been making regular payments and has not defaulted but fears that a credit crunch may result in near future, may also take advice from a credit counselor.



Fees charged for credit counseling-

Usually, the fees charged by a credit counseling company depend mainly on the income of the consumer. Fees comprise a monthly fees as well as a start up fees. As per industry standards, the fees charged by a credit counseling company cannot exceed 20% of the monthly income of the consumer.

The credit counseling industry is booming-

The credit counseling industry is currently a USD$7 billion industry. Over the years, the industry has grown by leaps and bounds. Earlier, there used to be very few credit counseling companies offering quality services to the people. With increase in the number of the credit counselors, fraudulent activities have also become rampant.

Credit counseling has earned some unfavorable judgment-

Reports have suggested that there are many companies who “fly-by-night” and leave individuals lamenting. In fact, the FTC or the Federal Trade Commission has received innumerable complaints against such fraudulent companies. These may be regarded as some of the reasons why not all consumers rely on credit counseling. There have been many instances when consumers either had to drop out of credit counseling sessions or were cheated off their money.



Thanks to Jason Holmes for contributing this article to our Bankruptcy blog:

Do It Yourself Bankruptcy