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Defined in simple terms bankruptcy is a legally declared inability or impairment of ability of an individual or organization to pay its creditors. It is a federally authorized procedure by which a debtor whether an individual, corporation, or municipality is relieved of total liability for its debts by making court-approved arrangements for their partial repayment. Bankruptcy proceedings are supervised by and litigated in the United States Bankruptcy Courts. These courts are part of the District Courts of the United States.
Bankruptcy law is a branch of civil law that covers federal bankruptcy and state insolvency laws and regulations as they apply to individuals, municipalities and businesses. The complexity of the laws in this area calls for the service of skilled personnel.
Creditors may file an involuntary bankruptcy petition against a debtor, in an effort to recoup a portion of what they are owed or in order to begin a restructuring. In majority of the cases bankruptcy proceeding is initiated by the debtor (the insolvent individual or organization) and is termed as voluntary bankruptcy. During bankruptcy, a court administers the estate of a debtor for the benefit of creditors. In voluntary bankruptcy proceedings, individuals or businesses may file for bankruptcy in an attempt to resolve a hopeless financial situation; although, from time to time, a creditor may force the filing of an involuntary bankruptcy proceeding.
Bankruptcy law provides for the development of a plan that allows a debtor who is unable to pay his creditors, to resolve his debts through dividing his assets among his creditors. This supervised division also allows the interests of all creditors to be treated with some measure of equality. Certain bankruptcy proceedings allow a debtor to stay in business and use revenue generated to resolve his or her debts. An added purpose of bankruptcy law is to allow certain debtors to free themselves to be discharged of the financial obligations they have accumulated, after their assets are distributed, even if their debts have not been paid in full.
Various modes of filing for bankruptcy available to a debtor are under Chapter 7 termed as liquidation or straight bankruptcy. It is the most common type of bankruptcy proceeding in which the assets of the individual or business, filing for bankruptcy are sold (liquidated) to pay off the creditors.
Bankruptcy Chapter 9 deals with Municipal Bankruptcies, which pertain to bankruptcy proceedings reserved exclusively for cities, and towns who cannot pay off their debts.
Bankruptcy Chapter 11 deals with Substantial Debt Reorganization, which pertains to bankruptcy reserved for filers with unsecured or secured debts of prescribed limits. Although usually filed by businesses, individuals may also file under chapter 11.
Bankruptcy Chapter 12 deals with bankruptcy for Family Farmers and Fishermen exclusively and provides certain benefits not available to those filing under other chapters.
Bankruptcy under Chapter 13 provides reorganization of a debt by the court. The US CODE under Chapter 15 permits such proceedings for ancillary and other cross border cases used mostly by people who also have debts in countries outside of the United States. In the United States bankruptcy proceeding is permitted to be filed only once in every eight (8) years.
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