Chapter 7 and Chapter 13 Bankruptcy

The two most common forms of bankruptcy are Chapter 7 and Chapter 13. Chapter 7, known as "straight bankruptcy," provides for complete liquidation of debt. In return the creditor has to surrender all his non-exempt assets via liquidation and ensuing distribution to the creditors. Chapter 13 bankruptcy also called "reorganisation,"allows the debtor to reorganise his debt structure over 3-5 years. To be eligible for Chapter 13 the creditor must prove to the court that he has sufficient income to repay his debts. If approved, he must submit a detailed payment plan.

Chapter 7 Bankruptcy is most often used for debtors who have few property assets except for their basic furniture and house necessities, and who have little money remaining at the end of the month, or may even have trouble meeting basic expenses.

The advantages of Chapter 7 bankruptcy are that it provides for total discharge of debts and the procedure moves rapidly. Once the debtor has filed bankruptcy, his creditors cannot collect the debt from him directly.

To qualify to file Chapter 7 a debtor must pass the means test, which determines if his entire income is under a certain specified limit.

Chapter 13 bankruptcy is applicable to debtors who have large amounts of equity, have a monthly income and other assets, but are incapable of keeping up with their monthly credit payments. Debtors accepted for a Chapter 13 bankruptcy agree to work out a 3-5 year plan (longer in the future), and will cooperate with a credit counsellor to pay their debts. Monthly payments are made through the "debt trustee," who apportions the money to creditors according to a predetermined dispersal plan. Payments in this form of bankruptcy are made from accessory income that is left over after basic expenses are taken care of, food, clothing, shelter, etc. To be eligible for Chapter 13 bankruptcy a debtor must have unsecured debts below $360,475 and secured debts less than $1,081,400.

In both Chapter 7 and Chapter 13 the debtor must obtain mandatory credit counselling within 180 days prior to filing bankruptcy with the courts. The counselling is designed to give debtors a chance to solve their financial problems themselves and with the help of the course counsellors, without the need to go to court. In addition this course, as well as additional courses that people in bankruptcy must take, aims to teach people in debt how to manage their finances so they won't go into debt again after they come out of bankruptcy.

Declaring Bankruptcy

The word bankruptcy derives from the composite Latin words bancus and ruptus, actually conoting a broken (ruptus) bench (bancus). In ancient Roman times, bankers set up benches in the market place from whence they would proffer loans and effectuate financial transactions. If a banker became insolvent, his bench was smashed as a sign that he was no longer capable of securing debts.

There were many different ancient approaches to bankruptcy. Both Ancient Israel and Greece had systems of insolvency and debt forgiveness, forgiveness following 5 years in Greece and 7 years in Israel. In the mean time, creditors might have to sell themselves as slaves to pay the debt. In actuality there were exceptions to the normal policy in both countries, and being a debt slave was not so pleasant, even if he was more than just an ordinary slaves.

In other countries, the treatment of debtors was much crueler. In the law book of Gengus Khan, a man who sank into debt three times was put to death. From Russia comes stories of Cossaks who would brutalize and on occasion kill peasants who were unable to pay their debts.

In our days, modern civilizations offer an substitute to historical bankruptcy. People who who are bankrupt have the chance to pursue debt restructuring, bankruptcy education to help debtors rearrange their debts and maintain their financial life. In the United States, the power to enact laws of bankruptcy is found in Article 1, Section 8, Clause 4, and the Bankruptcy Code, is found in Title 11 of the United States Code.

Many- of the focus of American debt law is 1) to enable debtors to to restore solvency as much as possible and 2) to reeducate the debtor so that he won't return debt again after he comes out from bankruptcy. The education process in bankruptcy is at least three fold.

The first part of the education comes from the debtors interaction with the bankruptcy lawyer. A bankrupcty attorney works his entire legal life in the courts and appears before Judges who interpret and in many cases create current thought about bankruptcy. During the first meetings with the client, the bankruptcy lawyer will help the client to explain the financial mess he has gotten into, in an orderly fashion. His morass of debts will be broken down into a detailed description of assets,debts, including liens on property and back taxes, current monthly income, and expenses. The client will be requested to summarize how he came to be in debt.

If the debtor elects to pursue the process further, he must take a bankruptcy counseling course taught by licensed professionals. During this course he will learn techniques of debt management, and he will decide if he is capable of getting himself out of debt with the assistance of these techniques, and thus avoid bankruptcy, or if he wants to proceed with bankruptcy .

If he chooses to proceed with bankruptcy, he will have to take a course on bankrupcty management. This course will provide him the information he needs to proceed with the bankruptcy and to remain debt free after he emerges from bankruptcy.

During the course of his bankruptcy, the bankruptcy lawyer, the courts, the debtor, and the creditor will keep in touch in and out of court, and in keeping with the bankruptcy laws, the debts will be restructured and settled to the greatest extent possible, and some of the debt will be forgiven. When the debtor comes out of bankruptcy, he will be permitted to continue his business, with whatever credit restrictions the court concludes are appropriate.