What Is Bankruptcy?


Bankruptcy is technically defined as the legal status of a person or other legal entity that cannot repay the debts it owes to other.

In the US, bankruptcy is generally understood as system specifically authorized by the Constitution which helps people, businesses, and government entities recover from excessive debts. This system is part of the United States Code and is available in all US States and Territories. While bankruptcies proceed in different fashions from State to State, overall they help eliminate or repay some or all of the debts while they are protected from harassment and lawsuit from their creditors.

This system has a special Federal court created, the Bankruptcy Court. The judges which sit on the court help guide the bankruptcy by providing decisions on major intersections and conflicts within the bankruptcy. They can, for example, decide which claims creditors make are, or are not allowed into the bankruptcy; when debtors can receive a fee waiver; and even the likely outcome of a trial. These judges have a wide variety of authority within the bankruptcy and ultimately provide the guidance on the heaviest of issues. That said, other Federal courts can hear bankruptcy appeals, even the Supreme Court of the United States occasionally writes opinions on bankruptcy issues.

For consumer and some business cases, a trustee provides the routine oversight of each case. This includes reviewing accuracy of financial and asset statements and income disclosures. If there are assets that need to be sold and distributed, which usually occurs in business bankruptcies, the trustee is the person who will handle that. They take in and distribute payments as call for by the bankruptcy; this is particularly true in Chapter 13 bankruptcies. For most consumer cases, the trustee is the only official, besides their attorney, who they routinely interact with.

The common aspects to all bankruptcies are the fresh start and the protection from creditors.

Bankruptcy provides filers with a fresh start by providing different varieties of debt relief. In some cases, it is a discharge that provides the relief. A bankruptcy discharge relieves the debtor from various debts owed that are listed on their bankruptcy schedules. Usually these discharge what are called unsecured, non-priority debts which are the bulk of what people worry about in credit situations. Other types of debts have other options available, such as abandonment where a bankruptcy filer can set aside leases and contract that they no longer want. In other cases, regular payments are made so that the debtor can further rely on and maintain existing obligations that provide benefits to the debtor, like mortgages and car notes. This allows the debtor to focus on maintaining their life and improving it rather than fighting off banks and other lenders. Ultimately, the goal with the fresh start is to provide a new, unburdened life for the individual or company. This will allow that debtor to enter into new financial relationships that are healthier and promote long term growth for the debtor and the community at large.

Bankrupt debtors also receive initial protection from creditors through the Automatic Stay imposed by the Bankruptcy Code. This stay works by preventing creditors from initiating collection proceedings or actions. Things like lawsuits and garnishments are clearly stopped, but even collection calls and utility shut-offs are avoided by filing bankruptcy. In order for a creditor to proceed during the bankruptcy proceeding, they must be granted court permission to do so. Debtors have the opportunity to challenge the creditors at those proceedings and seek to prevent the judge from granting permission. In addition, if the creditor acts without receiving court permission, then the debtor can sue the creditor and seek any damages incurred due to their action as well as attorney’s fees for bringing the lawsuit. Overall, creditors act very cautiously with the automatic stay and it provides breathing room so the debtor can focus on the decisions at hand and how to improve their life.

Bankruptcy, in sum, is a system that helps people move past their debts, whether they are business or individual debts. It does so by providing a framework that lets the debtor deal with the debts in various manners that help the debtor regain their stability and let’s them flourish.

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