Under US law, bankruptcy is not only possible for businesses and companies, but also legal for private individuals.
American law recognizes several forms of bankruptcy:
- Liquidation (= dissolution of debtor's assets)
- Reorganization of the debtor's assets for rehabilitation
Lawyers from Debtstoppers draw up a debt settlement plan together with the debtor. People seek these attorneys' advice to stop foreclosure, repossessions, card debt, and creditor harassment to avoid useless struggling over debt problems.
Insolvency law in the USA is governed exclusively by federal legislation. US insolvency law is governed by the current Bankruptcy Reform Act of 1978. Provisions of this Act are found within the United States Code of Laws - Title 11. And its most interesting Chapters regarding the article are 7 and 13.
Chapter 7 - Liquidation
This Chapter governs the complete removal of the debtor's assets to best satisfy creditors from the bankruptcy estate. The procedure is entrusted to a trustee appointed by the bankruptcy court. Under this provision, the majority of insolvencies are removed. Over-indebted private individuals use only their assets, not their monthly disposable income for debt relief, and they usually obtain residual debt discharge within a few weeks.
It applies to both corporations and individuals and is the counterpart to Chapter 9, Chapter 11, and Chapter 13, which set out the rules for reorganization. The filing of liquidation is also referred to here. The procedure described represents the most common form of insolvency. In 2000, about 859,000 over-indebted US citizens chose this procedure. After 6 years, a Chapter 7 proceeding can be conducted again.
There is a difference between voluntary and involuntary cases. In the first option, insolvency proceedings under Chapter 7 or 11 can be initiated after a voluntary petition by the debtor (voluntary case), and in the event of private individuals, this is possible under Chapter 13. The commencement of a case is defined right after the filing of an application and payment of the corresponding fees at a bankruptcy court. Private individuals must have taken advantage of additional 180 days of debt counseling beforehand.
As an alternative to a voluntary petition, proceedings under Chapter 7 or 11 can also be formed at the request of creditors (involuntary case). Normally, the applications of three creditors with unsecured claims in a minimum amount ($16,750 US dollars as of 2021) are necessary for this.
Chapter 13 - Reorganization/Consumer Reorganization
In consumer insolvency for individuals, the debtor must make payments to creditors according to a plan approved by the bankruptcy court. Afterward, all remaining debts are discharged by the court. In addition to assets, private individuals must also make their disposable income available to creditors for the duration of a three- to five-year insolvency period.
The debt relief granted under Chapter 13 is more comprehensive than that under Chapter 7, but the consumer debtor is generally entitled to the right to choose between the two procedures.
Usually, about one-third of all plans are fulfilled by debtors; about two-thirds have to be modified or even abandoned as a result of changed life circumstances.
Insolvency Subjects
American law differentiates strongly between different insolvency subjects. Chapters 7 and 11 are primarily devoted to insolvent companies as well as individuals who have a place of business or own property, Chapter 9 concerns the procedure for insolvent municipalities, and Chapters 12 and 13 regulate measures against insolvent individuals and consumers respectively (Adjustment of Debts of a Family Farmer or Family Fisherman or Individual with Regular Annual Income).
Order of Priority
Bankruptcy assets are divided among creditors according to their rank:
- Priority creditors (distribution costs, post-insolvency debts, wage claims, tax debts, etc.)
- Fines, penalties, shareholders
