When a person is no longer able to meet financial obligations but is being vigorously pursued by creditors, he or she may seek protection in bankruptcy. Similarly, a business that has fallen under deep fiscal duress may file for bankruptcy. Bankruptcy law exists to assist those who, often under no fault of their own, find themselves overburdened with debt. Under bankruptcy, assets may be liquidated, but debts may also be discharged.
Bankruptcy is under federal jurisdiction, and bankruptcy matters are heard in federal court. A trustee is usually appointed to manage affairs. The debtor may hire a bankruptcy lawyer to represent his or her interests during the proceedings.
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Consumer bankruptcy, also called debtor bankruptcy or personal bankruptcy, is when an individual debtor can no longer meet his or her financial obligations and seeks legal protection from creditors. In a bankruptcy proceeding, debts might be discharged and property may be liquidated to pay off debts. The debtor may hire a consumer bankruptcy attorney to represent his or her interests in the proceedings.
Most consumer bankruptcies fall under Chapter 7 or Chapter 13 of the Bankruptcy Code.
- Chapter 7: A Chapter 7 bankruptcy is the simplest and most common form of bankruptcy. In a Chapter 7 bankruptcy, the court appoints a trustee. The debtor may keep certain exempt property, which is determined by both state and federal law. The trustee then sells or "liquidates" the remaining property and pays off debts in order of legal priority. Most debts that remain after nonexempt property is liquidated are discharged, meaning the debtor no longer owes them and the creditors must cease collection efforts. To be eligible for Chapter 7 bankruptcy, the debtor must pass a "means test" to prove he or she makes under a certain median income, which varies by state.
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- Chapter 13: Chapter 13 bankruptcy is for debtors who do not wish to liquidate their assets and have the means to pay off debts over time, but are currently unable to meet financial obligations and are seeking protection from foreclosure, levy, garnishment or other tactics to collect. A Chapter 13 bankruptcy serves as a reorganization of the debtor's finances. The court will set a payment plan for the debtor in which the debtor pays the trustee, who then pays creditors.
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When a business files for bankruptcy, it usually does so under Chapter 7 or Chapter 11. Farms and fisherman may file under Chapter 12. Under a Chapter 7 bankruptcy, the business's assets and portions of the business itself are liquidated to pay off debts. The court appoints a trustee, who effectively takes over the company and determines what to be sold. Unlike a Chapter 7 consumer bankruptcy, a business entity's debts are not discharged at the end of the proceeding. Instead, the business entity is dissolved if debts remain.
Most businesses, therefore, prefer to file for Chapter 11 bankruptcy. The appointed trustee takes over operations of the company. However, unlike Chapter 7, the trustee does not liquidate assets. Instead, the trustee creates a reorganization plan, which the judge may approve. A business bankruptcy attorney may represent the business's interests during the proceedings.
Bankruptcies are filed and heard in a special federal court. While any attorney licensed to practice in front of the court may do so, some attorneys seek certification from an independent organization. Certified attorneys have shown that they meet certain experience, educational and knowledge requirements.
There are both national and state-specific certifications:
- American Board of Certification: The ABC is a national organization dedicated to bankruptcy law. It is accredited by the American Bar Association to certify attorneys as specialists in both consumer and business bankruptcy. Certified bankruptcy attorneys must show substantial participation and experience in the field.
Find a nationally certified business bankruptcy lawyer.
Find a nationally certified consumer bankruptcy lawyer.
- State Bar of Arizona Board of Legal Specialization: The State Bar certifies bankruptcy lawyers as specialists in Arizona. Attorney must show 50 to 70 percent of their practice is is dedicated to bankruptcy, meet experience requirements and pass a written exam.
- State Bar of California Board of Legal Specialization: California lawyers may seek certification in bankruptcy from the State Bar. Attorneys must have practiced for five years, spend at least 25 percent of their practice time in bankruptcy and pass an exam, among other requirements.
- New Mexico Board of Legal Specialization: Bankruptcy lawyers in New Mexico may be certified by the Board of Legal Specialization. They must meet requirements of involvement and experience in bankruptcy practice, and must pass an exam.
- North Carolina State Bar Board of Legal Specialization: North Carolina attorneys may become certified in both consumer and business bankruptcy law by the State Bar. They must meet requirements for experience and education and must pass a written exam.
- Supreme Court of South Carolina Commission on Continuing Legal Education and Specialization: The CCLES certifies bankruptcy and debtor-creditor law specialists in South Carolina. To be certified, attorneys must show substantial involvement, experience, references and pass a test.
- Texas Board of Legal Specialization: Texas attorneys may be certified by TBLS as specialists in business bankruptcy and in consumer bankruptcy. For certification, attorneys must show substantial involvement, meet experience requirements, provide attorney references and pass a test.
Bankruptcy is a complicated process, requiring intense focus to detail and an in-depth knowledge of the law in order to achieve the best result. Board certification is an indicator that the attorney has met independent standards for quality. Fees for bankruptcy attorneys vary. Many bankruptcy attorneys offer free intial consultations, or low-cost consultations where the potential client can gain an understanding of how much the bankruptcy is likely to cost.
American Bankruptcy Institute: The ABI is a Alexandria-based think tank that studies bankruptcy and makes recommendations to U.S. Congress on bankruptcy law.
Center for Bankruptcy Studies: This think tank researches bankruptcy. It is affiliated with St. John's University School of Law.