What is Bankruptcy?
The term “Bankruptcy” describes a set of laws that give people who need it relief from creditor attacks. Sometimes, “Bankruptcy” is used to describe the state of a person or company. For instance, “I am in bankruptcy” or “I am bankrupt”. Other times it describes the legal system for giving people a way out when they have no way to repay creditors.
Wikipedia describes bankruptcy as follows: “Bankruptcy is a legally declared inability or impairment of ability of an individual or organization to pay its creditors. Creditors may file a bankruptcy petition against a debtor (“involuntary bankruptcy”) in an effort to recoup a portion of what they are owed or initiate a restructuring. In the majority of cases, however, bankruptcy is initiated by the debtor (a “voluntary bankruptcy” that is filed by the insolvent individual or organization).”
Why Does Bankruptcy Exist?
There are two rationales for bankruptcy.
One is kindness, morality and humanity. The other is economic sense.
Kindness, Morality and Humanity
There are many reasons bankruptcy exists. One reason is kindness. The basic idea is that sometimes things happen to people that make it impossible for them to repay their debts. It could be loss of income, illness, economic downturn, death of a spouse, injury or even just an increase of the cost of living. Your Bankruptcy Lawyer can explain the statistics, but every year millions of people find themselves unable to pay their debts. Most civilized societies have concluded that if someone really can’t pay a debt, it is cruel to make him a slave or punish him. We should be forgiving. That is the moral basis for bankruptcy.
The moral background of bankruptcy goes back to biblical times and pre-biblical times. In western religion there has always been custom of forgiving people debts every seven years. This notion of debt-forgiveness is in Jewish, Christian, Moslem, Hindu, Buddhist and Secular traditions. We see it in the Old Testament, the New Testament, the Catholic traditions (Jubilee) and many other ways.
There is also an economic reason why bankruptcy exists. If people don’t have a way out of their debt when there is an emergency or inability to pay, they will be much less likely to take credit cards or loans. Imagine that you want to take a loan to start a business. If your society cuts off your hands or puts you in jail for not repaying your loan, would you take that risk? Probably not. However, if you know that if things don’t work out you will get a fresh start with bankruptcy, you will take the risk.
This kind of careful risk taking is GOOD for the economy. Our government decided that it is better to encourage people to start businesses, go to school, buy a car and do other things that require credit. In this way, we expand the economy. Yes, many people don’t have the success they dreamed of. Yes, many people don’t pay the loans and go bankrupt. But for every one of those people, there are more that create wealth in the society. Thus, the existence of a “way out” like bankruptcy was a good idea for the American economy.
A Simple Explanation of How Bankruptcy Laws Work
Bankruptcy is a set of laws created by the United States Congress for the economic and moral reasons described above. There are also state laws. The Federal Bankruptcy Laws apply in all states that don’t create their own bankruptcy laws. All bankruptcies in all states are governed and overseen by the USDOJ (United States Department of Justice). The USDOJ has a US Bankruptcy Trustee (United States Bankruptcy Trustee) for each region of the United States. The US Bankruptcy Trustee oversees a panel of local ‘panel trustees ‘. The panel trustee is the ‘gatekeeper’ of your bankruptcy case.
The Process When you file bankruptcy, you submit a bunch of papers to the court. These papers are called your “Petition and Schedules “. The papers document your inability to repay your debts. They show that you don’t have enough income to repay your debts and that you don’t have any assets you can sell to repay your debts. They show much more than that, but your bankruptcy attorney will be the best person to explain the details. Once you file your case with the court get interviewed by a panel trustee. His job is to make sure you are not hiding any assets, that you did not run up your debts fraudulently, and that you have not lied about your inability to repay creditors. This meeting is called a 341(a) exam or “meeting of creditors”. Click on the blue link to learn more about that meeting!
The Discharge Once your meeting of creditors is closed, and your panel trustee approves your bankruptcy, you are eligible to get a discharge of your debts! That means, all your debts that can be discharged, are discharged. At that point, you are done and ready to enjoy your fresh start.
Remember, you can only file bankruptcy once every eight years. So, make sure you do it right, and only when necessary. Your bankruptcy lawyer can advise you whether or not this is the best time for you to file bankruptcy.