Bankruptcy is complex, but its’ complexity lies more within the many Terms overlapping Rules that one must sort through, rather than the difficulty of the subject itself. Here is a boiled-down, simplified summary of the most common and important BankruptcyTerms:

Debtor: 

A person (or business) that files for Bankruptcy.

Bankruptcy Petition: 

This is the paperwork filed to begin the process. This is a rather large volume of documents about the Debtor, and lists what they currently earn, what they formerly earned, who they owe, and about how much, as well as what they own, and what it’s worth. Beyond that, it contains a listing of legal protections, called exemptions, which are various sections of the Bankruptcy law (known as the Bankruptcy Code, or more simply as The Code) that when called into play, protect a piece of the Debtor’s property so that they can keep it through Bankruptcy. These exemptions are applied to everything a person owns and wants to keep. Using these, it is generally possible for someone to come out of Bankruptcy with all the property they started with, including their home, all the stuff in it, their pension, retirement or 401k accounts, and automobiles.

Before a Bankruptcy Petition can be filed, the information necessary to complete the Petition must be collected and analyzed. How much a person makes is very important in determining if they can qualify for Chapter 7, which wipes out all of the debt. If a person makes too much money, and does not have enough allowable expenses to eat that income up, they must file for a sort of re-payment plan called Chapter 13. What percentage of the debt they must repay over a 5 year period depends on many factors, the most important of which is, not surprisingly, how much income they earn.

In a Chapter 7 Case, a person (or married couple, or business) essentially dumps all of their debt, and keeps all of their stuff. It sounds simple, and although the laws involved are not, the reality is that if you don’t make too much money to qualify, and you don’t have enough left over after paying your living expenses to enter into a serious repayment plan, you can be given a “fresh start.” Please note that my office only handles Chapter 7 cases.

Creditors:  

The banks, companies, people and other entities who are owed money. Often, I find that people mistakenly believe the creditors have some "say" in whether they get a discharge (more on that later) in Bankruptcy. The truth is that the creditors have somewhere between extremely little, and nothing, to say or do about your getting out of debt.  Generally, the only complaint available to a creditor is that you got into debt with them using some kind of fraud, like exaggerating your income. These cases are so rare, I don’t think I’ve seen even one the last two thousand cases I’ve handled.

Creditors come in two main classes, called Secured and Unsecured. The difference is really quite simple.

Secured Creditors:

These are entities to whom money is owed and who have a lien of sorts, or security, for their debt. A house is security for a mortgage, and a car is security for a car loan. In these cases, in order to keep the property, you have to continue to pay. In order to get out of the obligation, you have to give the property back.

Unsecured Creditors,

Most entities to whom money is owed fall into this class. Examples of Unsecured Creditors are things like credit cards, bank loans, medical bills, gym memberships, and a loan from your brother-in-law Fred. These debts are listed and then wiped out.

In my office, after we’ve met with the client and gathered their information, we begin to prepare the Bankruptcy Petition. Once done, we’ll have the client review it, making sure we listed things the right way, and answering any questions about what this or that legal term or designation means. After the Petition has been signed, it’s electronically filed with the Bankruptcy Court. At that point, something very important happens:

Automatic Stay:

Upon the filing of a Bankruptcy Petition, the Debtor becomes protected under an incredibly strong Federal Bankruptcy Law known as the Automatic Stay. This means that any creditor action against them whatsoever, no matter where, or at what stage, even if pending in another Court, must come to an immediate and dead stop. Such action is therefore stayed. Such creditor actions will remain stopped, or stayed, unless the creditor can show the court some compelling reason why they should be allowed to proceed. This, likewise, almost never happens with the kinds of cases I handle, and when it does, it’s only to allow a creditor who, for example, repossessed a car two months ago, and whom the debtor is listing in the Bankruptcy Petition to get rid of that debt anyway, to go ahead and sell the car.

Meeting of Creditors:

About 30 days after the Chapter 7 Bankruptcy Petition has been filed, a Hearing called the Meeting of Creditors is held down at the Bankruptcy Court building at 211 West Fort Street in Downtown Detroit, right by Cobo hall. Actually (and somewhat ironically) the Bankruptcy Court is in the Comerica Bank Building, and the hearings are held in separate hearing rooms on the third floor, many floors below the actual Courtrooms.

Trustee: 

The person who conducts the Meeting of Creditors. The Trustee’s job is to make sure the Debtor does not own or have the right to claim anything of value that cannot be protected by the exemptions we talked about earlier. In the overwhelming majority of cases, the Debtor simply answers a few questions about their income, expenses, and what they own, and in 5 minutes or less the whole thing is over.

Did you notice that I didn’t mention creditors? That’s because there are almost never any there, and the ones that do show up are usually from a bank that has, for example, financed a car and they want to know if you intend to keep the car and keep paying for it, or are planning on giving it back.

Discharge: 

This is the Bankruptcy Court’s order that permanently wipes out all of your debt. It is, in a very real sense, the pot of gold at the end of the rainbow. I’ll also explain a few things about rebuilding your credit and how you should be back up on your feet in no time. Although a lot of legal work goes into this process, the Debtor hires an attorney precisely to take care of those things so that the process is as simple to them and goes as smoothly as I have outlined.

Certain subjects, like Tax Liability, Business Bankruptcy issues, and complex financing agreements with cross-collateralization clauses simply cannot be boiled down to anything as simple as the descriptions above. Even the more complex issues, however, can be analyzed and explained without much difficulty, but much of that explanation depends on any number of factors unique to anyone’s particular situation.