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Introduction to Bankruptcy

Bankruptcy is a legal procedure for dealing with the debt problems of individuals and businesses. This procedure is covered under Title 11 of the United States Code (the Bankruptcy Code). The vast majority of cases are filed under the three main chapters of the Bankruptcy Code, which are Chapter 7, Chapter 11, and Chapter 13.

The scenarios referred to in this exercise support the video Bankruptcy: Don't Let it Happen to You, produced by the National Conference of Bankruptcy Judges. The scenarios are fleshed out in this material and include discussion questions. They are designed for judges and lawyers to use with teachers and students in the courtroom or classroom. The scenarios increase students' awareness of common financial pitfalls encountered by young people that can lead them to consider bankruptcy. Each anecdote also touches on the considerations for and consequences of bankruptcy. The scenarios are a springboard for discussing four common areas of risk for young people in high school, college, and the workforce.


Bankruptcy Cases

The primary function of a Chapter 7 bankruptcy proceeding is to liquidate the debtor's nonexempt assets and distribute the proceeds to the debtor's creditors. The primary function of a Chapter 11 and Chapter 13 bankruptcy proceeding is to reorganize the debtor's financial affairs through a court-approved plan. Through bankruptcy, most of the debtor's debts are eliminated, thereby providing an honest but unfortunate debtor a fresh start. Although each chapter differs from the others in significant ways, there are important elements that are common to all bankruptcy cases: automatic stays and discharges.

Automatic Stay
The first of these elements is the automatic stay. The filing of a bankruptcy petition automatically stays (holds off or stops) most actions against the debtor or the debtor's property. Creditors normally receive notice of the filing of the petition from the clerk. The stay arises by operation of law (automatically) and requires no judicial action. As long as the stay is in effect, creditors generally cannot initiate or continue any lawsuits, garnish wages, or make telephone calls demanding payments. The automatic stay provides a period of time in which all judgments, collection activities, foreclosures, and repossessions of property are suspended and may not be pursued by the creditors on any debt or claim that arose before the filing of the bankruptcy petition. The stay provides a breathing spell for the debtor, during which time negotiations can take place to try to resolve the difficulties in the debtor's financial situation.

Discharge
The second of these common elements is the bankruptcy discharge. One of the primary purposes of bankruptcy is to discharge (or forgive) certain debts to give an honest individual debtor a fresh start. The discharge operates differently in the various chapters.

Section 341 Meeting of Creditors
Under Section 341 of the Bankruptcy Code, a meeting of creditors must be held in most cases. This meeting usually occurs 20 to 40 days after a petition is filed. The debtor must attend this meeting, at which creditors may appear and ask questions regarding the debtor's financial affairs and property.

Either a U.S. Trustee, bankruptcy administrator, or a designee presides at the meeting. It is important for the debtor to cooperate with the trustee and to provide any financial records or documents that the trustee requests. To preserve their independent judgment, bankruptcy judges are prohibited from attending the meeting of creditors.