It provided for fast proceedings, encouraged debtors to reschedule their obligations rather than liquidate and helped creditors recover their claims against bankrupt estates. The 1994 Act also created the National Bankruptcy Commission, charged with investigating further modifications of the bankruptcy law. Latter laws, however, disregarded many of the Commission's recommendations. In April 2005, President George W. Bush signed the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005. Many experts consider this the most extensive rework of the U.S. bankruptcy law since 1978. The most important changes introduced in this Act concern individual bankruptcy cases, small business bankruptcies and cross-border insolvency cases (ABC Amega, Jackson).
II General Concept
Bankruptcy is governed by the Bankruptcy Code, which became effective in 1978 (Empowerment Zone 2007). It was amended in 1994 and then in 2005. The 2005 amendments formed the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 or BAPCPA. This Act ignited major changes for consumer bankruptcies and set into motion a few restrictive provisions for business bankruptcies. All bankruptcy cases must be filed with the federal Bankruptcy Court. It is monitored by a federal Bankruptcy Judge, who is appointed by the Circuit Court of Appeals. The Bankruptcy Judge may hear only bankruptcy cases. This is a specialized area of the law, which has its own set of courts and rules. These bankruptcy courts seem to maintain a kind of secret aura (Empowerment Zone).
Bankruptcy cases begin with the filing of a petition with the clerk of the Bankruptcy Court (Empowerment Zone 2007). The petition has two pages and identifies the debtor and the pertinent chapter of the Bankruptcy Code to apply. At the time of filing, an estate is created and all the debtor's assets are considered property of that estate. Everything before the filing is described as "pre-petition," and everything after it is described as "post-petition."
Who May File
Most anyone may file for bankruptcy (Empowerment Zone 2007). But if the court believes that the person who seeks it is abusing the law, it may deny the relief sought. Bankruptcy is a serious matter, which requires serious consideration. It has long-term serious consequence. The debtor should determine his personal and family needs, evaluate his assets against obligations, and consider alternatives to bankruptcy (Empowerment Zone).
Participation in Proceedings
In general, participants in bankruptcy proceedings are the debtor, the bankruptcy judge, the creditors, and the trustee (Empowerment Zone 2007). The debtor is the person seeking relief in the bankruptcy petition. He is also called petitioner. The bankruptcy judge is the judge who presides over the hearings. The creditors are persons, business entities or government agencies, which have monetary claims on the debtor. And the trustee is a court-appointed person who represents the interests of all unsecured creditors. He is accountable for the surrendered property of the debtor and for collecting and liquidating it. He also investigates the debtor's financial affairs, examines all of his proofs of claim, provides information to any interested party and files reports, certain tax returns and other records the court may require (Empowerment Zone).
Functions of the Bankruptcy Law
The Bankruptcy Law serves two main purposes (Consumer Education Center 2007). It provides a creditor with some payment if the debtor can afford to pay. Secondly, it gives the debtor a new start by canceling many of his debts according to a court-determined schedule of discharges (Consumer Education Center).
Kinds of Bankruptcy
Of those available to individuals, these are a liquidation type, a rehabilitation type for individuals or businesses, a rehabilitation type for individuals with regular sources of income, and a rehabilitation type for family farmers and fishermen (Consumer Education Center 2007). There is a rehabilitation type primarily for business debtors or individuals with huge debts and assets. The liquidation and the rehabilitation type for individuals with regular sources of income are the most important types for consumers. Both types offer or make possible payments to the creditor, a discharge for the debtor and supervision by a trustee. The liquidation type involves surrendering some of the debtor's property, at least theoretically, in exchange for the discharge of many debts. The trustee sells his non-exempt property to pay the creditor. Under the rehabilitation type for individuals with regular sources of income, the debtor can keep his property but has to commit to a three-year-to-five-year repayment plan. As a result, he secures a discharge of most of the debts not paid in the plan. Under both types, creditor have to stop collection after the case is filed. The debtor is protected by "automatic stay," a relief, which is often temporary (Consumer Education Center).
Difference Between the Liquidation Type and the Rehabilitation Type for Individuals with Regular Sources of Income
The liquidation type is, as the term says, for liquidation (Consumer Education Center 2007). The debtor gives up some of his property at the time he files the bankruptcy case. The trustee uses the sale to pay the creditor. The debtor has no assets over and above what the law allows him to keep. He, thus, does not give up any property. Approximately 90 days after the case is filed, the debtor has most of his debts discharged. Some are cancelled, but some must be paid after the case. Examples of those, which are left are child support payments, some taxes, student loans, collaterals for loans. Only those in the list at the time of bankruptcy are cancelled or discharged. The debtor is allowed to keep the money he earns after filing the case. He may also keep most of the property he acquires after the filing (Consumer Education Center).
The rehabilitation type for individuals with a regular source of income is quite different (Consumer Education Center 2007). Under this type, the debtor pays some of his debts over time from his current income and according to a court-approved plan. He keeps all of his property, exempt or not, but he makes regular payments on his debts out of his income after filing the bankruptcy case. The plan payment must be the same total or at least as much as the creditor will have received if the debtor has just liquidated. His payments are given to a trustee who, in turn, makes the payment or distributes it to creditors, if there is more than one. The payments are made according to a regular installment plan, as proposed by the debtor. He is usually assisted by a lawyer. The repayment plan usually lasts until the debt is fully paid or up to three or five years. The debtor is discharged from his debt at the completion of the plan (Consumer Education Center).
The law allows a debtor to choose the type of bankruptcy to file for (Consumer Education Center 2007). But he needs to qualify for that type. Bankruptcy cases filed for the liquidation type are now more limited. An individual debtor with primarily consumer debts who wants to file for the liquidation type must be prepared to have his finances investigated to determine his capability to repay. A set formula, called a "means test," is used for the investigation. It is meant to force debtors with some capability to repay to do so rather than have their debts discharged. This test compares his excess monthly income with the amount of unsecured debt. This will show how much he is capable of paying his creditor but under the rehabilitative type for individuals with regular sources of income. The computations are only hypothetical and do not reflect the actual capacity of the debtor to meet his obligation. If he appears capable of repaying the minimum of his debts, but in reality, cannot, he may be allowed to file for the liquidation type. However, the means test is a complex procedure. If the test shows that the debtor is capable, he will be ineligible to file for the liquidation type. If he wants to file a bankruptcy, he must do so under the rehabilitation type for individuals with regular sources of income the qualifications for the rehabilitative type are a regular income and no indebtedness over and above $922,975 in secured debt and $307,675 in unsecured debt. These amounts tend to increase. Examples of secured debts are home mortgage and auto loans. Examples of unsecured debts are usually credit card debts (Consumer Education Center).
The Value of Bankruptcy
It imposes an injunction against collection activities of creditors (Consumer Education Center 2007). Creditors are obligated to stop pursuing and troubling the debtor. This is termed "automatic stay.(Consumer Education Center)." The policy behind it is that the debtor is entitled to some "breathing" space while his assets are evaluated or while reorganization is going on (Johnsen 2003). A creditor who violates the automatic stay by continuing to pressure the debtor may be subjected to monetary sanction or some other penalty (Johnsen).
Discharging a debt means that the debtor no longer has the obligation to pay it (Consumer Education Center 2007). It prohibits the…