Recent released statistics indicate that Chapter 7 bankruptcy filings were up 25 percent over the 12- month period ending June 30, compared to the prior year.

Recent released statistics indicate that Chapter 7 bankruptcy filings were up 25 percent over the 12- month period ending June 30, compared to the prior year.

Apparently, things are getting worse, rather than better, for a lot of people out there.

I don’t handle bankruptcies, but I have seen lots of people who have needed to and did file bankruptcy.

I have also represented creditors who are owed money by someone who files bankruptcy, and I have also been a creditor of a bankrupt debtor myself.

There are several types of bankruptcy proceedings, but far and away the most common is a simple Chapter 7.

In a Chapter 7 bankruptcy, the debtor files a petition with the Bankruptcy Court, part of the Federal Court system, in which he is required to list and itemize everything he has, and its value; and everyone he owes, and how much.

Immediately upon the filing of a bankruptcy petition, the Federal Bankruptcy Court issues an “automatic stay” order, a broad and basic order that all parties immediately cease all action to collect or enforce a debt against the debtor.

Collection calls must stop.

Lawsuits to collect money are put on hold.

Repossessions cannot go forward.

And, home foreclosure proceedings are halted.  

In fact, it is not uncommon for a bankruptcy petition to get filed literally hours, or sometimes even minutes, before a foreclosure sale of the debtor’s house is scheduled to be held on the courthouse steps. And guess what happens then. The sale is immediately called off, for the time being anyway.

Because all debts, claims and security interests against the debtor and their property become subject to the rules, regulations and oversight of the Federal Bankruptcy Court. And nothing happens without its approval once a proceeding is commenced and the automatic stay order issued.

From the assets listed in the bankruptcy petition, the debtor is entitled to pull out, keep and retain their exempt property, which are items of property under a certain value in various defined categories.  

The exemption value thresholds are quite low, however, in reality most people in bankruptcy are still able to fudge the value of their assets in their bankruptcy petition so as to get under the exemption threshold, and keep everything they have.

Whatever property may be left after exemptions, if any, is liquidated and the proceeds distributed pro rata to the creditors who are owed money.  

After that, the bankrupt party’s debts are then cancelled, discharged, or, as one of my law school professors use to say, “erased through the magic of bankruptcy.”

Those cases in which all property listed by the debtor is able to be claimed and retained as exempt property are called “no asset” bankruptcies.  

These constitute the vast majority of Chapter 7 cases.  In no asset cases, the unsecured creditors get nothing.  

This typically includes credit card companies, health care providers, landlords owed back rent, lawyers who are owed legal fees, and other lenders and creditors without collateral.  

This is how bankruptcy to gives those who may be hopelessly in debt a fresh start – by taking most of their assets (if they have any), sprinkling them among the parties they owe money to (if there is anything to sprinkle), and discharging their debts.

Not all property is subject to being taken from the bankrupt debtor and distributed to his creditors in a bankruptcy. In addition to the itemized exemptions, many pension and retirement plans, regardless of size or value, are allowed to be retained by the bankrupt debtor.

Also, not all debts are dischargeable, such as past due child support and maintenance, income taxes, or claims arising from intentional or drunken acts, such as claims or judgments arising from fraud, assaults, or accidents in which the debtor was intoxicated.

All in all, I understand the need for an individual hopelessly buried in debt to get a fresh start.

However, having represented creditors, and having been a creditor myself whose claim has been wiped out in bankruptcy, my sympathy and understanding are challenged when that happens to me or my client, particularly where the bankrupt individual has been financially irresponsible, has lived a lifestyle beyond their means, and has used bankruptcy as an easy out.