Goals of the Bankruptcy System

A fundamental goal of the federal bankruptcy laws enacted by Congress is to give debtors a financial " fresh start" from burdensome debts. The Supreme Court made this point about the purpose of the bankruptcy law in a 1934 decision:

[I]t gives to the honest but unfortunate debtor a new opportunity in life and a clear field for future effort, unhampered by the pressure and discouragement of preexisting debt. Local Loan Co. v. Hunt, 292 U.S. 234, 244 (1934).

This goal is accomplished through the bankruptcy discharge, which releases debtors from personal liability from specific debts and prohibits creditors from ever taking any action against the debtor to collect those debts.

Types of Bankruptcy

Six basic types of bankruptcy cases are provided for under the Bankruptcy Code. The cases are traditionally given the names of the chapters that describe them.

Chapter 7

Chapter 7, entitled Liquidation, contemplates an orderly, court-supervised procedure by which a trustee takes over the assets of the debtor' s estate, reduces them to cash, and makes distributions to creditors, subject to the debtor' s right to retain certain exempt property and the rights of secured creditors. Because there is usually little or no nonexempt property in most chapter 7 cases, there may not be an actual liquidation of the debtor' s assets. These cases are called " no-asset cases." A creditor holding an unsecured claim will get a distribution from the bankruptcy estate only if the case is an asset case and the creditor files a proof of claim with the bankruptcy court. In most chapter 7 cases, if the debtor is an individual, he or she receives a discharge that releases him or her from personal liability for certain dischargeable debts. The debtor normally receives a discharge just a few months after the petition is filed. Amendments to the Bankruptcy Code enacted in the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 require the application of a " means test" to determine whether individual consumer debtors qualify for relief under chapter 7. If a debtor' s income is in excess of certain thresholds, the debtor may not be eligible for chapter 7 relief.