Bankruptcy is a proceeding in which a court administers the property and other assets of a debtor (generally called "estate") for the benefit of creditors. The Federal Bankruptcy law governs bankruptcy proceedings, except, when and where Congress has chosen to defer to the states. The United States Constitution authorizes Congress to adopt uniform laws on bankruptcy. The Federal bankruptcy laws has these goals: |
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To ensure fair treatment for creditors, and |
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To permit a fresh start for individual consumers and business debtors involved in bankruptcy proceedings. |
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| Debtor - A debtor is a person or business who owes money to others, such as individuals, companies, governments, etc. A typical example of a debtor is one who owes money on credit card, car loans and mortgage. |
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| Creditor - A creditor is an individual or corporation that is owed money. A typical example of a creditor is the credit card companies; banks that advance car loans or financial institutions that make mortgage loans. |
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For purposes of bankruptcy proceedings, an individual or corporation may consider filing bankruptcy if the person/corporation |
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Can only pay minimum amounts on credit card and other bills; |
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Is unable to make minimum payments on credit card and other bills; |
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Has been threatened with foreclosure, lawsuit, etc; |
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Have had a severe financial setback, such as losing a job or a major client (for a corporation or business people), a divorce or a costly illness. |
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Though there are alternatives to filing bankruptcy, such as |
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Getting help from credit counseling agencies;
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Refinancing of mortgages or other loans; |
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Trying to negotiate with creditors to reduce monthly payments or to skip payments, etc. |
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| Sometimes these services might not be able to assist if ones financial circumstances are such that even minimal payments are impossible. |
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There are consequences of filing bankruptcy |
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| Firstly, creditors may take a past bankruptcy into account when deciding whether to extend credit. Secondly, many creditors regard a person who has filed for bankruptcy to be a higher credit risk and may either deny credit or extend credit on less favorable terms. Thirdly, bankruptcy filings remain on a consumer's credit report for seven to ten years. |
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Debts that may not be discharged in bankruptcy |
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| Bankruptcy does not discharge all debts. Some of the debts that may not be discharged in bankruptcy are: |
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Recent large purchases |
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Fines or penalties imposed by governmental agencies |
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Fraudulent debts/loans |
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Types of bankruptcy |
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| The Federal bankruptcy law contains different provisions or chapters that apply to specific bankruptcy proceedings: |
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Chapter 7, straight bankruptcy, wipes-out entire debts (except for non-dischargeable debts). |
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Chapter 9 applies to municipal governments. |
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Chapter 11 this applies to businesses, it gives businesses opportunity to reorganize themselves. |
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Chapter 12 applies to family farms. |
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Chapter 13 permits individuals to minimum amounts and stretch out their payment over a period of time, usually, five years. |
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