Cecily Zamora
While bankruptcy in the United States is governed by federal law, certain aspects are dictated by state law, including exemptions. There are two types of bankruptcy exemptions: federal and state. The federal law has a set of exemptions available for some bankruptcy filers, but each state has its own unique set of exemptions. In most states, a bankruptcy filer is required to use the state exemptions, but some states allow filers to choose between federal and state exemptions. Bankruptcy courts also have local rules and regulations, which vary across districts.
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What You'll Learn
Bankruptcy is governed by federal law, but states have their own exemptions
Bankruptcy is a legal process that allows individuals or organisations to seek relief from debts they cannot pay. In the United States, bankruptcy is governed by federal law, specifically the Bankruptcy Code, which was enacted in 1978 under Title 11 of the U.S. Code. This code outlines different bankruptcy chapters that individuals or entities can file under, depending on their circumstances. While bankruptcy is governed by federal law, states have their own exemptions and laws that govern the relationship between the debtor and creditor.
The United States Bankruptcy Code recognises several chapters under which bankruptcy cases can be filed, with Chapters 7, 11, and 13 being the most common. Chapter 7 provides for the discharge of unsecured debt, such as credit card debt, and is available to individuals with primarily business debt. Chapter 11 offers several options for reorganising debt, such as repaying, discharging, or restructuring debt, and is typically used by corporations due to its complexity. However, individuals can also file for Chapter 11, especially if they wish to retain their assets and continue operating their business during the bankruptcy process. Chapter 13, on the other hand, is specifically for individuals with regular income, allowing them to repay their debts over a period of 3 to 5 years while retaining their property.
While bankruptcy is primarily governed by federal law, states have the authority to pass laws that govern the debtor-creditor relationship. These laws can vary significantly from state to state, and some states allow debtors to choose between federal and state exemptions. Exempt property can include essential assets such as a home, car, tools of the trade, and personal effects. The purpose of these exemptions is to ensure orderly and reasonable debt management, preventing the punitive seizure of items of little to no economic value.
The specific exemptions available to debtors depend on the state in which they file for bankruptcy. For example, in some states, exempt property may include equity in a home or car, while in other states, an asset class like tools of trade may not be exempt unless claimed under a more general exemption for personal property. Additionally, some states have property laws that allow trust agreements to contain legally enforceable restrictions on the transfer of beneficial interests, known as anti-alienation provisions, which protect beneficiaries from creditors acquiring their share of the trust.
It is important to note that bankruptcy laws and exemptions can be complex, and seeking advice from a bankruptcy lawyer is recommended before making any decisions regarding bankruptcy filings.
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Chapters 7, 11, 12, 13 and 18 each have different bankruptcy procedures
In the United States, bankruptcy laws are contained in the Bankruptcy Code, which was enacted in 1978 and has been amended several times since. The Code outlines different bankruptcy types, or 'chapters', for various situations. Chapters 7, 11, 12, 13 and 18 each have different bankruptcy procedures.
Chapter 7 is often called the 'liquidation' chapter. It is designed for individuals, corporations, and partnerships that are unable to repair their financial situation and pay their existing debts. Under Chapter 7, a trustee is appointed to take possession of the debtor's non-exempt property, liquidate it, and use the proceeds to pay off creditors. Any remaining debts that are part of the bankruptcy are dismissed.
Chapter 11 is often referred to as the 'reorganisation' chapter. It allows corporations, partnerships, and individuals to reorganise their finances without liquidating all assets. The debtor proposes a plan to creditors, which, if accepted and approved by the court, allows them to restructure their finances and continue operating.
Chapter 12 is similar to Chapter 13 but is designed specifically for family farmers and fishermen. It allows them to propose a plan to make instalment payments to creditors over a three-to-five-year period.
Chapter 13 permits individuals with regular incomes who are burdened by debts to file a plan to repay a portion of their debts. The debtor agrees to pay a certain percentage of their future income to the bankruptcy court trustee for payment to creditors. If the court approves the plan, the debtor is protected while repaying the debts.
Chapter 18, added to the Bankruptcy Code in 2019, provides additional protections for small businesses. It allows small business owners to restructure their finances and retain control of their business operations during the bankruptcy process.
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Bankruptcy exemptions vary between states
Bankruptcy exemptions play a significant role in determining whether you can keep your house, car, pension, and retirement funds. While there are federal bankruptcy exemptions, each state has its own set of exemption laws, and some states allow you to choose between state and federal exemptions. These exemptions vary greatly from state to state, and even within a state, there may be multiple options to choose from. For example, California offers two sets of state exemptions, allowing debtors to choose the one that best protects their property.
Exempt property may include equity in a home or car, tools of the trade, and some personal effects, such as prescribed health aids and government benefits. The specifics of what is exempt differ between states. For instance, the homestead exemption, which protects your ownership interest in your home, varies in terms of the amount of equity and acreage covered, as well as whether it applies to manufactured homes. In all states, the property must be your residence, and you must have lived in it for over 40 months before filing for bankruptcy to avoid a cap on the exemption amount.
The type of bankruptcy you file for also influences which exemptions apply. Chapters 7 and 13 are the most common types of bankruptcy for individuals. In a Chapter 7 bankruptcy, you lose property not covered by an exemption, and the bankruptcy trustee sells it for the benefit of your creditors. In contrast, Chapter 13 bankruptcy allows you to keep all your property, but you must pay your creditors the value of any property not covered by an exemption in your repayment plan. Certain exemptions apply regardless of the chapter, such as prescribed health aids and government benefits.
The availability of exemptions can also depend on the timing of your bankruptcy filing. For example, the homestead exemption amount changes every three years. Additionally, debtors may be able to convert some property from non-exempt to exempt form before filing their bankruptcy case. This strategy allows them to protect more of their assets.
Bankruptcy laws and exemptions are complex and vary not only between states but also within states and across different chapters of bankruptcy. It is essential to understand the specific laws and exemptions applicable to your situation when considering bankruptcy.
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Bankruptcy courts have limited jurisdiction
The United States Bankruptcy Code (title 11, United States Code) and the Federal Rules of Bankruptcy Procedure govern bankruptcy cases. The current Bankruptcy Code was enacted in 1978 by § 101 of the Bankruptcy Reform Act of 1978 and came into effect on October 1, 1979. It replaced the "Chandler Act" of 1938, which had given the Securities and Exchange Commission significant power over the regulation of bankruptcy filings.
The 1978 Bankruptcy Act, also known as the Bankruptcy Code, established bankruptcy courts with expanded jurisdiction to hear all cases "arising under" and "related" to bankruptcy proceedings. This marked a shift from the previous system, where ordinary controversies related to bankrupt estates were primarily handled in state courts. The district courts were designated as "courts of bankruptcy" and were responsible for gathering the assets of insolvent debtors and distributing them to creditors.
However, bankruptcy courts have limited jurisdiction in certain situations. For example, in the case of Grella v., the hearing on a motion for relief from an automatic stay was deemed a "summary proceeding of limited effect" and not a proceeding for determining the merits of the underlying substantive claims, defences, or counterclaims. Additionally, Rule 9020 of the Bankruptcy Rules addresses findings of contempt for acts not committed in the presence of the bankruptcy judge, and the ruling is subject to review under Rule 9033(b).
The jurisdiction of bankruptcy courts has been a subject of debate, with amendments made over time to expand their authority. The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 is another example of legislation that impacted bankruptcy law, making it more difficult for consumer debtors to file for bankruptcy.
In summary, while bankruptcy courts have the authority to hear cases related to bankruptcy proceedings, their jurisdiction is limited in certain situations, as outlined by various legislative acts, court rulings, and procedures.
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Bankruptcy laws were amended in 2005 to make it harder to file
The United States Bankruptcy Code (title 11, United States Code) underwent significant changes in 2005 with the passage of the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA). The Act was signed into law by President George W. Bush on April 20, 2005, and made it more difficult for consumers to file for bankruptcy, particularly under Chapter 7.
The BAPCPA introduced several amendments to the bankruptcy process. Firstly, it raised the priority status for the payment of domestic support obligations, such as alimony and child support, ensuring that claimants in these areas are paid before other unsecured creditors. Secondly, the Act overhauled the treatment of complex financial contracts, including derivative contracts used by hedge funds, and also reformed the handling of ancillary foreign bankruptcy proceedings.
The 2005 changes also clarified that certain derivatives and financial transactions were exempt from provisions in the bankruptcy code that freeze a failed company's assets until creditors are paid out. This marked a significant departure from the traditional process of paying off creditors. Additionally, the BAPCPA placed non-ERISA pension plans, such as 457 and 403(b) plans, in the same category as ERISA-qualified plans regarding exemption status.
The impact of the 2005 bankruptcy law was substantial, with research indicating a 50% reduction in household bankruptcy filings. Specifically, there were approximately one million fewer filings in the two years following the law's implementation compared to the previous system. This decrease was particularly notable among Chapter 7 filings, as a result of the new means test. The law also contributed to a decline in interest rates, with credit card companies passing on a significant portion of their savings from reduced bankruptcy write-offs to consumers.
However, the law faced criticism for potentially harming struggling families facing medical debt or other crises, while benefiting powerful financial interests. Additionally, the requirement for financial education courses and increased filing and attorney fees created further barriers for filers. Overall, the amendments to the bankruptcy laws in 2005 made it more challenging for consumers to file for bankruptcy, particularly those from middle- and lower-income backgrounds.
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Frequently asked questions
Bankruptcy is a legal process that helps people who owe money, or debtors, get relief from debts they cannot pay. It also helps creditors get paid from the debtor's assets.
There are different types of bankruptcy, including Chapter 7, Chapter 11, Chapter 12, and Chapter 13. Chapter 7 involves the liquidation of non-exempt assets to pay off creditors. Chapter 11 allows for the reorganization of debt and is usually for corporations. Chapter 12 is a simplified reorganization for family farmers and fishermen, and Chapter 13 is similar to Chapter 11 but for individuals with regular income.
Bankruptcy will remain on your credit report for 7 to 10 years, depending on the type of bankruptcy. This will make it more difficult to borrow money in the future.
It depends on the type of bankruptcy and the laws of the state where you live. In some cases, you may be able to keep essential assets, such as your home and car, but you may have to sell non-exempt assets.
