In essence, a voluntary bankruptcy case is a legal proceeding filed by a debtor who seeks relief specifically provided for by a federal law, the Bankruptcy Code. (Involuntary bankruptcy cases may also be brought against debtors, but they are very rare in nonbusiness situations.) The bankruptcy proceeding must be brought in U.S. District Court and is normally referred to the bankruptcy court for that district. The bankruptcy court is a unit of the district court.
The purposes of bankruptcy are usually described as twofold:
- a fresh start for the debtor and
- equity among creditors.
In most cases involving consumer debtors, the first is by far the more significant because there are typically few assets to be distributed, equitably or otherwise, to the creditors involved.
Bankruptcy has provided millions of people with relief from the incessant collection calls, letters and other harassment tactics that accompany unpaid debts. Bankruptcy is sometimes the best way to prevent the loss of housing, utility service, income, a car or driver’s license, and even one’s freedom, because imprisonment may result from the failure to comply with orders to pay support or other indebtedness. Bankruptcy can save a family thousands of dollars, a home, a car or a job, and it may accomplish these desired results better, faster and with less expenditure of time and money than any other means.
Types of bankruptcy
The Bankruptcy Code provides for five types of bankruptcies:
- Chapter 7: Liquidations
- Chapter 9: Municipal bankruptcies
- Chapter 11: Reorganizations
- Chapter 12: Adjustments of debts of family farmers
- Chapter 13: Adjustments of debts of an individual with a regular income
These types of bankruptcies are commonly referred to as “chapters” because each type is covered by different chapters of the Bankruptcy Code. Of these five types, only Chapters 7, 11 and 13 are available to individuals. And only Chapters 7 and 13 are commonly used by individuals.
Requirements for filing for bankruptcy
There are no minimum debt requirements to file for Chapter 7 or Chapter 11 bankruptcy. Individuals and businesses may file irrespective of the amount of their debts. Chapter 13, however, is available only to individuals with unsecured debts of less than $269,250 and secured debts of less than $807,750.
The bankruptcy system
All bankruptcy proceedings take place in the U.S. Bankruptcy Court.