Bankruptcy can be defined as the legal process by which a person or an organization can declare their inability to pay to their creditors. One of the main purposes of the bankruptcy laws in the US is to provide a person with a fresh start by resolving his debts through the division of his assets among his creditors. Bankruptcy laws also allow a debtor to free himself from his accumulated debts, after the distribution of his assets, even if the debt is not fully paid.

Bankruptcy proceedings are supervised by the US bankruptcy courts situated all over the country. These courts are a part of the District Courts of the United States.

There are 2 basic types of bankruptcy proceedings in the US They are:

1. Chapter 7 filing:

A filing under Chapter 7 is also called liquidation of assets. It is a process where a court-appointed trustee takes over the assets of the debtor, sells it and distributes the cash to the creditors. It’s the most popular form of bankruptcy in the US since it allows the debtor to be debt-free within a very short time. A Chapter 7 bankruptcy usually wipes out all debts.

2. Chapter 13 filing:

A filing under Chapter 13 is designed for a person with regular income source. This form of bankruptcy is more preferable than Chapter 7 bankruptcy because it allows the debtor to retain a valuable asset such as a house. It also allows the debtor to design a plan, approved by the court, to repay the debts to his creditors over a period of time. The debtor is protected from lawsuits or any creditor actions while the plan is in effect.

Bankruptcy laws in the US underwent some major changes on October 17, 2005. Here’s a rundown of the major changes for consumers in the bankruptcy law:

• Determination of your income: The first step in figuring out whether you can file Chapter 7 bankruptcy is to check the current monthly income. If your income is lower than the median income for a household of your size in your state, then you can file a Chapter 7 bankruptcy otherwise you’ll have to pass the Means test – which is another important change in the new law.
• Means test: This is one of the major changes in the bankruptcy law. This procedure helps to find out your monthly disposable income after subtracting certain expenses allowed by the IRS. The steps of a Means test are as follows:

1. Calculate the total monthly income.
2. Subtract the expenses allowed by the IRS like fooding, grocery expenses, etc.
3. Subtract the secured debts like mortgage payments, student loans, etc.

The amount left over after subtracting your debts and expenses will help you to determine whether to go for a Chapter 7 or a Chapter 13 bankruptcy.

• Credit counseling: The new law also requires mandatory credit counseling from a government approved program. The purpose of the counseling would be to help the debtor with the basics of home budgeting and financing. Credit counseling must take place before filing the bankruptcy.
• Automatic stay protection: The new law also prohibits the automatic stay protection to the debtors which they used to get once they file a bankruptcy. This means that the filers are no longer protected against possible eviction or driver’s license suspension.

While bankruptcy allows for the discharge of a number of debts, other debts like student loans, criminal fines and liens will remain as non-dischargeable debts according to federal regulation. If you’re seriously considering filing a bankruptcy, seek the advice of an attorney to know about the details of the bankruptcy laws in the US before filing a bankruptcy.