Bankruptcy, at its core, is a provision of federal law, designed to provide relief to creditors and debtors. Various parts of the bankruptcy code cover individuals, business, farmers, and even municipalities in either completely discharging existing debts or restructuring those debts to provide for their repayment under different terms than the debts were incurred. Proceedings may be voluntary, where the debtor seeks relief, or involuntary where the creditors initiate the process.
A straight bankruptcy or liquidation proceeding occurs under Chapter 7 of the Bankruptcy Code. Typically a debtor who can no longer meet its financial obligations must liquidate or sell its assets, with a few exceptions, and use those monies to pay off the creditors. The creditors are usually prioritized in terms of their position for which gets paid in what order, and a trustee pays off the creditors until all the liquidated assets are exhausted. Creditors that are not paid, or paid less than a full amount of their money due, are unable to pursue additional monies from the debtor.
A wage earner’s plan or a repayment plan occurs under Chapter 13 of the Bankruptcy Code. Here, an insolvent debtor who meets some statutory earnings requirements (wages, salary, or commission) can submit a plan to pay off all of the debtors existing financial obligations – but have more time to pay off his or her unsecured creditors; this plan must be agreed upon with the creditors and confirmed by the court. If a debtor fails to timely pay off his or her debt under Chapter 13, a liquidation proceeding under Chapter 7 of the code typically remains a viable option.
Bankruptcy courts are specialized federal courts established to oversee bankruptcy proceedings. The judges who serve on bankruptcy courts are federal judges, who unlike Article III judges, are not appointed by the President and confirmed by the Senate for life terms, but rather, are appointed for renewable 14 year terms by a majority of the judges who serve on the United State Court of Appeals in the circuit where the bankruptcy judge will sit. Congress does control the total number of bankruptcy judges, and sets the salary for the bankruptcy judges.
Individuals who are considering bankruptcy often have had difficulty paying off credit cards, resulting in low credit scores and contact with debt collection agencies. The activity of debt collectors is mainly regulated by the Fair Debt Collection Practices Act. While this law is aimed at deterring bad behavior from debt collectors, such as harassment and lying to debtors, it largely leaves the activity of creditors trying to collect on a debt unregulated. Many states, however, similarly regulate the activity of creditors in collecting debts. Individuals sometimes can run up a large debt via identity theft. Family members or strangers may use personal information, such as social security numbers or computer passwords, to assume the identity of another and apply for credit and make purchases in the name of another.