Individuals filing for bankruptcy are able to file their cases under Chapter 7, Chapter 11 or Chapter 13 of the federal Bankruptcy Code. Filing for bankruptcy provides debtors with the ability to reorganize their finances and start from scratch. Debtors must file their bankruptcy cases in the federal U.S. District Courts. After filing their initial petitions, a bankruptcy court assigns a trustee to oversee the debtor's case and to pay off his debts. Chapter 7 trustees must liquidate a debtor's assets.
Overview
After a debtor files the initial bankruptcy petition, he must provide a list of his assets and liabilities. Once filed, the petition automatically "stays" debt collection efforts against a petitioner, and while the bankruptcy is pending, a debt collector or creditor cannot contact her. The federal court appoints a bankruptcy trustee who is responsible for paying a petitioner's debts and helping her reorganize or liquidate her debts. After liquidating a debtor's assets and repaying as many debts as possible, the debtor receives a discharge in bankruptcy, which wipes away most of her debts before bankruptcy.
Bankruptcy Petitions
Generally, Chapter 7 bankruptcy proceedings entail liquidation, since Chapter 11 is reserved for reorganizing a debtor's assets. Although Chapter 7 bankruptcy cases automatically create a stay against most creditors, debtors are still responsible for paying government debts, child support payments, alimony and judgments to certain victims. The bankruptcy court requires that each debtor file a financial information statement after the initial filing date. The Bankruptcy Code allows debtors to designate certain property as exempt pursuant to federal or state law.
Bankruptcy Procedures
After a debtor provides financial information and gives his trustee a complete list of his debts and assets, the trustee is responsible for liquidating all of a debtor's nonexempt assets. Although state laws vary as to what types of property are exempt, many states allow debtors to shield or protect their primary residences from collections. The bankruptcy trustee orders the sale of nonexempt assets and pays outstanding debts in order of priority. Typically, trustees pay off secured debtors first and then pay a percentage of debts held by unsecured creditors. Secured creditors are those with property rights.
Exempt Property
In addition to laws exempting a debtor's home from liquidating, most states also allow debtors to exclude necessities from bankruptcy liquidation. Under the federal Bankruptcy Code, Chapter 7 debtors can choose to exclude property from liquidate according to federal law or to their home states' bankruptcy laws. For 2011, the federal Bankruptcy Code's homestead exemption allows a debtor to shield $21,165 of a debtor's principal residence. The federal Bankruptcy Code also exempts up to $3,450 for a personal vehicle and up to $11,525 in household good or furnishings. Additionally, under federal law, pension benefits, stock bonus plans and 401k plans are exempt, and trustees cannot liquidate these assets.
Considerations
Since bankruptcy laws can frequently change, do not use this information as a substitute for legal advice. Seek advice through an attorney licensed to practice law in your state.
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