As bankruptcy attorneys, we live bankruptcy day in and day out. We sometimes forget to address the basic questions. Aside from a vague understanding of the definition of the word ‘bankruptcy,’ most people don’t know what it is. So, let’s get back to basics; what is bankruptcy?
What is Bankruptcy? Bankruptcy is a judicial process whereby the debtor may seek and receive forgiveness of debt. Let’s unpack that definition.
Bankruptcy is a Judicial Process
The authority of bankruptcy law comes from the U.S. Constitution; specifically, Article I, Section 8 authorizes Congress to establish uniform laws on the subject of bankruptcies. The law that Congress enacted is contained in Title 11 of the U.S. Code. Bankruptcy is federal law and applies nationally. Congress set up bankruptcy courts to handle bankruptcies. Bankruptcy is a judicial process as it requires the debtor to file a petition with the court to seek debt forgiveness.
Since bankruptcy is a judicial process, and our justice system is adversarial in nature, there is an opposing side to the debtor. Your opposition in bankruptcy is the bankruptcy trustee. The bankruptcy trustee is appointed to represent the interest of your creditors, collectively. That is done for efficiency as opposed to having each creditor show up and mess with the case. The trustee’s role is to orderly seek and manage any distribution that might be made to creditors from the debtor’s bankruptcy. A distribution may result if some of the debtor’s assets are sold (e.g. chapter 7 bankruptcy) or if the debtor proposed a payment plan (e.g. chapter 13 bankruptcy).
The Debtor May Seek Forgiveness of Debt in Bankruptcy
The purpose of bankruptcy is to allow a struggling debtor to obtain forgiveness of debt. The goal and result of bankruptcy is the bankruptcy discharge order. The discharge order is what forgives debt (so to speak). The bankruptcy discharge is, in fact, a permanent injunction against anyone from attempting to collect a debt of the debtors. So, although we often speak in terms of bankruptcy eliminating debt, that is not what technically happens.
The bankruptcy code excepts certain debts from discharge The biggies that fall in the non-dischargeable category are back child support, back income taxes that are 3 years old or less, student loans, and criminal restitution among others.
So, when you file bankruptcy, you are initiating an adversarial court process seeking to have your debt forgiven.