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What is Bankruptcy?

sBasically, bankruptcy is a legal process where individuals, families and businesses (typically called Debtors) can seek to gain some relief from the various debts that they owe to creditors. The main goal of our bankruptcy system is to provide relief to debtors in the form of a Fresh Start or a second chance.  Another goal of the bankruptcy system is to provide an orderly payout to creditors. Prior to having an organized bankruptcy system, creditors would be paid out on a first come-first serve basis. When a person or business was in financial duress, the creditors would “race to the courthouse” to try and get paid first and it created chaos. So, bankruptcy is legal process (Federal Law in the US) that really is designed to have two purposes: a Fresh Start for Debtors and Equity (or fairness) among Creditors.  In most consumer bankruptcy cases (by far the highest percentage of cases filed), it really is the Fresh Start that’s the focus of the case because there just isn’t much of a payout (if any) to creditors.  Approximately 1 million individuals, families and businesses file for bankruptcy protection every year.

The history of Bankruptcy in the United States.

aThe history of bankruptcy in the US goes all the way back to the late 1700’s when our founding fathers were drafting the Constitution. Article 1, Section 8 of the Constitution grants Congress the power to establish federal laws on the subject of bankruptcy.  The first federal law on bankruptcy was way back in the year 1800 and these laws have been changed many, many times since.  Our modern law on bankruptcy really started in 1978 and created what we now refer to as the “Bankruptcy Code.”  The Bankruptcy Code has been amended several times with the most recent overhaul taking place in 2005 and that’s the Code that we operate under today.

What are the different types of Bankruptcy?

sThe Bankruptcy Code is broken down into several different chapters.  What type of bankruptcy one might file, depends on which chapter of the Bankruptcy Code they file under.  Technically, there are six different types of bankruptcy one might file: Chapters 7, 9, 11, 12, 13, and 15.  Practically speaking, most cases are going to fall into one of three categories: 7, 11 or 13.  For most consumers (the focus of my practice), there are typically only two chapters to choose from: 7 or 13.

Who are the Players in the Bankruptcy System?

aWithin the bankruptcy system there are a lot of players:  There is the Bankruptcy Code which is the written set of rules (the law) that is drafted by Congress.  There’s also the Bankruptcy Court. The Bankruptcy Court is a federal court which is a part of the United States District Court for each jurisdiction.  The Bankruptcy Court is made up of federal Bankruptcy Judges which are highly specialized judges that oversee primarily just bankruptcy cases.  There are debtors which are typically the individual, family or business that is seeking some form of relief from their debts.  The creditors are the entities that own the debt the debtors owe (banks, mortgage company, lenders, medical providers, taxing authorities, etc).  There’s this thing called a Bankruptcy Estate. The Estate is really all the property, interests, and assets that can be administered by the Court in a bankruptcy case. This is a bit confusing and I’ll explain the Bankruptcy Estate in a lot more detail later.  The next player is the Bankruptcy Trustee (sometimes called the Panel Trustee). The Trustee’s job is primarily to administer the assets of the Bankruptcy Estate, which really means to see if there are any assets or interests that can be liquidated or converted to cash to provide an equitable payout to creditors.  Not to be confused with the Bankruptcy Trustee, is the United States Trustee. The US Trustee (UST) has a broad responsibility to oversee the administration of the entire bankruptcy system. The UST appoints bankruptcy trustees, conducts meeting of creditors and tries to ensure a fair and smooth process for those involved in the bankruptcy system.

Bankruptcy exemptions: What property is protected?

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Bankruptcy exemptions are probably the most important part of the bankruptcy systems for consumers.  The exemptions protect the assets that you need to move forward with your life and get that Fresh Start.  Getting a Discharge from the Bankruptcy Court that wipes out a lot of debt is great! There’s no question about that. But…that Discharge would not be as nearly as valuable as it is, if the cost of the Discharge was that the Trustee can take everything.  Wiping out debt is great, but if the cost of wiping out that debt was walking out of the bankruptcy court naked without a pot to piss in, well, if that was the case it’s probably just not worth it.  Thankfully, Section 522 of the Bankruptcy Code, a beautiful piece of legislation,  allows the debtor to exempt certain property from the estate.  What that really means is that exempt property is protected. You get to keep it and still get your discharge. GOD BLESS AMERICA!

I don’t want to get on my soapbox here for too long, but I really do want to stress what a big deal the exemptions are! This area of law truly is one of the last remaining social safety nets in our country.  The billionaires, the corporations, banks..… money… money is in charge. More than ever!  He who has the gold has the power.  Big business makes the rules in America… and each year they grab a little more power.  Our bankruptcy system is one of the last places normal people can find relief when they get in trouble with big business. The exemptions are what allow our bankruptcy system to actually provide relief to these normal people seeking relief from big business.

Simply put…. exemptions are assets that people get to keep when they file for bankruptcy.  Now, which set of exemptions apply to a bankruptcy case is much more confusing.  It depends on where you file your case. Bankruptcy is Federal Law and according to the US Constitution, this law is supposed to be “uniform” throughout the country. Uniform really means applied the same throughout the country.  The Bankruptcy Code has it’s own set of exemptions.  It’s really just a list of which assets are protected and up to how much in value. So the Code sets the exemptions.  But… what happened in 1978 when Congress was tying to pass the modern Bankruptcy Code law, was there was a last minute compromise that got put into the law that allowed states to “opt out” of the federal exemptions.  So, states can choose to prohibit the use of the federal exemptions spelled out in the Bankruptcy Code and use their own exemptions.  32 state have elected to do so.  In those “opt out” states you can’t use the federal exemptions and must use the applicable state exemptions. Usually, the state exemptions are better than the federal exemptions (especially the homestead exemption which can often times be the most important exemption).  Colorado is one of the states that has opted out so in Colorado we only use state exemptions.  Now, if that’s not confusing enough, if you’ve lived in multiple states during the two years prior to filing your case which states exemptions laws you can use is very confusing.

What is Bankruptcy Litigation?

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What is litigation? Litigation is basically the term that the legal systems uses for the process of settling disputes between parties.  While most consumer bankruptcy cases do not really involve any actual litigation, there can be a lot to fight over in a bankruptcy case. The possibility of litigation is what can often guide the parties and the process in resolving disputes, without having to have any formal litigation.

Litigation within the Bankruptcy Court can be broken down into two broad categories: Adversary Proceedings and Contested Matters. An Adversary Proceeding is basically a lawsuit within the core bankruptcy case that follows rules of procedure substantially similar to the Federal Rules of Civil Procedure.  Contested Matters are other litigation that occur within the bankruptcy case but are treated less formally than adversary proceedings.

Common issues that debtors and creditors fight over in bankruptcy: Automatic stay violations; Discharge injunction violations; Objections to claims; Objections to discharge; Fraud; Fraudulent transfers and Preferences.

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