Persons or companies that are unable to pay debts may declare bankruptcy. Bankruptcy is a a legal process in which the financial affairs of the debtor (a person or a company) are placed in the hands of the bankruptcy court. The process is intended to protect the creditors of the debtor and assure their equal treatment.

Voluntary and Involuntary Bankruptcy

If the person or company files a petition for bankruptcy, the bankruptcy is considered voluntary. However, the unpaid creditors of the person or company can force the person or company into bankruptcy by filing an involuntary bankruptcy petition. Voluntary bankruptcy is more common than involuntary bankruptcy.

Types of Bankruptcy

There are several types of bankruptcy procedures. Chapter 7 bankruptcy (named for Chapter 7 of the federal Bankruptcy Code) is the procedure most commonly used by individuals. When a person files Chapter 7 bankruptcy, the court appoints a trustee who collects the assets, sells them, and distributes the proceeds to the creditors. Some assets are exempt under federal or state law. Once a person declares Chapter 7 bankruptcy, that person cannot file Chapter 7 bankruptcy again for six years.

Chapter 13 bankruptcy (named for Chapter 13 of the federal Bankruptcy Code) is a procedure available to an individual who has regular employment and income. Under Chapter 13, the court can approve or reject a plan for the person to pay off some of the person's debts over a certain time period. The person is permitted to keep property if the plan is approved.

Chapter 11 bankruptcy (named for Chapter 11 of the federal Bankruptcy Code) is a procedure aimed at reorganizations and is generally used by businesses to restructure their debts through a payment schedule. Chapter 11 is also available to individuals.

Federal Rules of Bankruptcy Procedure

Bankruptcy is governed by the federal Bankruptcy Code. The Federal Rules of Bankruptcy Procedure control bankruptcy procedure in the federal courts.

Local federal courts are permitted to adopt their own local rules of practice as long as the local rules are consistent with the Bankruptcy Code and the Federal Rules of Bankruptcy Procedure.

Key Provisions of the Federal Rules of Bankruptcy Procedure

Bankruptcy procedure is quite detailed and complex. The Federal Rules of Bankruptcy Procedure regulate the filing of a voluntary or involuntary petition in bankruptcy. They also provide for the scheduling or listing of the debtors' assets and debts. The Bankruptcy Rules set out the procedures for appointing a trustee in bankruptcy, notice to the creditors, and the filing of a bankruptcy claim. Finally, the Bankruptcy Rules specify the procedure to be followed in hearing bankruptcy cases or in approving or rejecting reorganization plans.

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