Basic Types of Bankruptcy Proceedings

A filing under Chapter 7 (http://www.law.cornell.edu/uscode/11/ch7.html) is called liquidation. It is the most common type of bankruptcy proceeding. Liquidation involves the appointment of a trustee who collects the non-exempt property of the debtor, sells it and distributes the proceeds to the creditors.

Bankruptcy proceedings under Chapters 11 (http://www.law.cornell.edu/ uscode/11/ch11.html), 12 (http://www.law.cornell.edu/ uscode/11/ch12.html), and 13 (http://www.law.cornell.edu/ uscode/11/ch13.html) involve the rehabilitation of the debtor to allow him or her to use future earnings to pay off creditors. Under Chapter 7, 12, 13, and some 11 proceedings, a trustee is appointed to supervise the assets of the debtor. A bankruptcy proceeding can either be entered into voluntarily by a debtor or initiated by creditors. After a bankruptcy proceeding is filed, creditors, for the most part, may not seek to collect their debts outside of the proceeding. The debtor is not allowed to transfer property that has been declared part of the estate subject to proceedings. Furthermore, certain pre-proceeding transfers of property, secured interests, and liens may be delayed or invalidated. Various provisions of the Bankruptcy Code also establish the priority of creditors' interests.

However, a recent decision by the Supreme Court has shifted this power towards the debtor. In Rousey v. Jacoway (http://www.law.cornell.edu/ supct/html/03-1407.ZS.html), (April 4th, 2005), the Court held that assets in Individual Retirement Accounts (IRA’s) (http://www.investopedia.com/ terms/i/ira.asp) are protected under 11 U.S.C § 522(d) and thus exempt from withdrawal from the bankruptcy estate. This decision has broad implications for the baby-boomer generation, providing millions of Americans nearing retirement with increased protection of their earnings.

Recent passage of the Bankruptcy Prevention and Consumer Protection Act (http://thomas.loc.gov/cgi-bin/bdquery/ z?d109:SN00256:TOM:/bss/d109query.html) in April 2005 has also resulted in major reforms in bankrupcy law, outlining revised guidelines governing the dismissal or conversion of Chapter 7 liquidations to Chapter 11 or 13 proceedings. The law also expands the responsibilities of the United States Trustees Program to include supervision of random and targeted audits, certification of entities to provide credit counseling that individuals must receive before filing for bankruptcy, certification of entities that provide financial education to individuals before being discharged from debt, and greater oversight of small business Chapter 11 reorganization cases.