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February 16, 2010

Bankruptcy Basics

Filed under: — Barry @ 6:23 pm

The Bankruptcy Process

Article I, Section 8, of the United States Constitution authorizes Congress to make  “uniform Laws on the subject of Bankruptcies.” It was under this provision that in 1978 Congress enacted the “Bankruptcy Code”.  The Bankruptcy Code, is codified in Ttitle 11 of the United States Code.  It has been amended several times since then and is the uniform federal law that governs all bankruptcy cases.

The Federal Rules of Bankruptcy Procedure (often called the “Bankruptcy Rules”, and abbreviated FRBP) and local rules of each bankruptcy court control the procedural aspects of the bankruptcy process.  The Bankruptcy Rules contain a set of official forms for use in bankruptcy cases. The Bankruptcy Code and the FRBP   along with the local rules detail the Formal Legal Procedures for dealing with debt problems of individuals and businesses.

California has four Bankruptcy Districts.  The Central District of California Bankruptcy district is headquartered in Los Angeles.  It is the largest single district in California and the United States.  The Central District of California has five courthouses: Santa Barbara, Woodland Hills, Los Angeles, Riverside and Santa Ana, and 19 judges.

Bankruptcy Judges are the decision-makers in federal bankruptcy cases.  A bankruptcy judge may decide any matter connected with a bankruptcy case, such as eligibility to file or whether a debtor should receive a discharge of debts. A great deal of the bankruptcy process is administrative and is conducted outside of a court room.  In cases under chapters 7, 12, or 13, and sometimes in chapter 11 cases a trustee is appointed to oversee the case.

A debtor will usually have very little interaction with the bankruptcy judge.  A typical chapter 7 debtor will not appear in court and will not see the bankruptcy judge unless an objection is raised in the case. A chapter 13 debtor may only have to appear before the bankruptcy judge at a plan confirmation hearing. Usually, the only formal proceeding at which a debtor must appear is the meeting of creditors, which is usually held at the offices of the U.S. trustee. This meeting is informally called a “341 meeting” because it is governed by section 341 of the Bankruptcy Code;  the debtor is required to attend this meeting so that creditors can question the debtor about debts and property.

A fundamental goal of the federal bankruptcy laws enacted by Congress is to give individual debtors a financial “fresh start” from burdensome debts.

In 1934 the Supreme Court made this point about the purpose of the bankruptcy law in a 1934 decision:

“[I]t gives to the honest but unfortunate debtor…a new opportunity in life and a clear field for future effort, unhampered by the pressure and discouragement of preexisting debt.”  Local Loan Co. v. Hunt, 292 U.S. 234, 244 (1934). This goal is accomplished through the bankruptcy discharge, which releases debtors from personal liability from specific debts and prohibits creditors from ever taking any action against the debtor to collect those debts. This document describes the bankruptcy discharge in a question and answer format, discussing when a discharge happens, what debts are discharged and what debts are not discharged, objections to discharge, and revocation of the discharge.

We will also discuss what a debtor can do if a creditor attempts to collect a discharged debt after the bankruptcy case is concluded.

Six basic types of bankruptcy cases are provided for under the Bankruptcy Code;  The cases receive their names from the chapters that describe them.

Chapter 7 – Liquidation
Chapter 13 – Personal Reorganization
Chapter 11 – Reorganization
Chapter 12 – Reorganization for Family Farmer or Fisherman
Chapter 9 – Municipal Bankrutpcy (Remember the Orange County, California Bankruptcy of the 1990’s)
Chapter 15 – International Bankruptcy (Beyond the scope of this website).

The bankruptcy process is complex and relies on legal concepts like the “automatic stay,” “discharge,” “exemptions,” and “assume.”

Because of the complexity and number of bankruptcy specific terms, we provide a glossary of Bankruptcy Terms to explain, in layperson’s terms, how most of the legal concepts that apply in cases filed under the Bankruptcy Code.

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