What are the Core Proceedings of a Bankruptcy Case, Part 1

Who needs bankruptcy?

Although individual filings differ, all bankruptcy cases unite under one common element: the inability of debtors to pay creditors. Individuals and businesses file bankruptcy to relieve financial problems created by overwhelming debt.

Financial pressure leading to bankruptcy can negatively stigmatize debtors, when considered or assumed to result from irresponsible consumer spending or business practices. However, many bankruptcies also result from catastrophic life circumstances such as divorce, medical emergencies and other unforeseen or unpredictable events that affect people and commerce.

No matter the situation, bankruptcy legally allows debtors to reorganize or to dismiss financial obligations owed to creditors. Legal protection from out-of-control debt can involves some combination selling assets to pay creditors, reducing or dismissing payments to creditors, and a repaying with a plan negotiated with creditors.

Legally protecting debtors from creditors avoids severe punishment for people who cannot not pay what they owed. The first bankruptcy laws in the 1800s effectively outlawed sending debtors to prison. Modern bankruptcy laws appeared in the late 1970s. Originally, federal bankruptcy law created an opportunity for debt relief as a road to a more secure financial future. However, recent and stricter rules address flagrant abuses of bankruptcy law.

New Bankruptcy Rules, 2005

Abuse of the right to file bankruptcy takes advantage of perceived loopholes in the law, such as provisions for multiple filings and the length of time between subsequent declarations of bankruptcy. Congressional lawmakers continually revise bankruptcy law to address such loopholes.

Recent congressional action to update and to change bankruptcy law can be interpreted as more favorable to creditors. As of October 16, 2005, The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 adds rules for filing bankruptcy and increases the difficulty of avoiding financial obligations to creditors, particularly for individuals.

Federal bankruptcy law winds a complex maze of codes and statues intended to discourage frivolous claims. Attempting to understand bankruptcy law adds pressure to a situation that might require tremendous personal, financial and emotional energy. Basic knowledge unravels the maze.

Bankruptcy: The Basics
Three types of legal protection from the burdensome debt falls into chapters, which correspond to specific codes in federal law. Filing under chapters of bankruptcy includes:

Chapter 11: Large corporations and other businesses in financial trouble file bankruptcy under Chapter 11. A Chapter 11 claim allows restructuring and reorganizing of debt. Business can continue to operate under Chapter 11 bankruptcy.

Chapter 7: The sale of business assets pays creditors. The insolvent company also goes out of business under Chapter 7 bankruptcy.

Chapter 13: A count-appointed trustee reorganizes the debt for individuals and manages a plan to repay creditors under Chapter 13 bankruptcy,

Chapter 11, Chapter 7 and Chapter 13 remain options for filing bankruptcy, although recent updates to federal bankruptcy law seek to reign in scofflaws. Despite negative attitudes toward bankruptcy, legal protection for individuals and businesses unable to pay their debts is likely a part of American society for the foreseeable future.