Bankruptcy Protection

First things first, let me clear a huge misunderstanding in your mind, there is nothing known as a 'bankruptcy protection act', there is no law with such a name. But protection against bankruptcy is provided for in the bankruptcy code of the United States. This code is in the Title 11 of the United States constitution and is divided into Chapters. These chapters are provisions for bankruptcy rules and laws and provide for certain types of bankruptcies and their proceedings. The protection provisions are mentioned in these laws throughout the code. But before we get to know what the provision is, let us get to know more about the mechanism of bankruptcy and some of their related proceedings.

About Bankruptcy in United States

Bankruptcy proceedings in the United States are presided over by the Title 11. A person or a business organization is said to be insolvent when the amount of liabilities, exceeds the amount of assets and the person or organization is unable to discharge any kind of debt. Thus, basically the person or business organization owes more money than it can pay. In such a case where the condition is almost unresolvable, some people consider filing or declaring bankruptcy. There are two primary bankruptcy proceedings which can be used. The first type is where the assets of the bankruptcy filer are sold off and the liabilities are repaid. The second type is where a hold is put on both the debts and the liabilities are reorganized into a concrete repayment schedule. Then the debts resume and the bankruptcy filer needs to repay the debts in the given time period. Chapter 7 bankruptcy involves the complete liquidation of assets, whereas the Chapter 11, 12 and 13 involve the reorganization of debts. The term, protection has a different meaning in both the contexts.

What is Bankruptcy Protection?

The law relating to bankruptcy is formulated in such a manner that adequate protection in bankruptcy is provided, not just to the bankruptcy filer but also to the creditors. The protection however, differs a bit depending upon the proceedings.

Chapter 7 Bankruptcy
The Chapter 7 bankruptcy is where the court liquidates the assets of the person filing for the bankruptcy. To ensure that the interests of all the parties are protected, the court appoints a bankruptcy trustee. The trustee takes up the custody of assets. Then he takes a meeting of the creditors and debtors. In these meetings, all questions regarding the assets and debts are cleared. The trustee makes a pro-rata/ proportional allocation of the realizable value of the assets. By law, first the secured creditors followed by the unsecured creditors are repaid. This minimizes and in some cases also rules out the possibility of loss for creditors. Apart from that the trustee makes sure that neither party makes unsolicited claims against each other. There are some essential items known as chapter 7 bankruptcy exemptions, which are not sold off. Protecting assets from bankruptcy is not required as the exempted items are never included in the proceedings. The trustee ensures the safety of these items. As a part of bankruptcy proceedings, the trustee also ensures that the person gets the best price for liquidation.

Chapter 11, 12, 13 Bankruptcy
The chapter 11 protection and the chapter 12 and chapter 13 protections differ a little bit from one another. On the whole, the court, bankruptcy filer and trustee, work out a schedule which is followed by the person filing for bankruptcy. The trustee and the court extend the protection in order to ensure two things, one that no creditor is making an unsolicited claim against the debtor and two that the debtor is not violating the repayment schedule. Apart from that, the court and trustee also provide sound financial advise to help the person out of debt.

Things like protecting inheritance in bankruptcy, heirlooms and other personal assets which are not exempt is almost impossible.