This is the first in our three-part series on bankruptcy. In this lesson, we'll talk about some of the key terms when we discuss bankruptcy, and the procedure that a bankruptcy case follows as it works its way through a bankruptcy court. You can't talk about debtor-creditor relationships without talking about bankruptcy, and talk about it we will. This is the first in a three-part series of lessons about bankruptcy. The first thing I want to say about bankruptcy is that it's awesome. Now, if you've ever been through bankruptcy, or you know anyone who's been through bankruptcy, you might think, "It was definitely not awesome." But let me tell you what I mean. Conceptually, the fact that we have a bankruptcy system in this country that's enshrined in our Constitution is amazing, because it allows people to take risks. It gives them a fresh start if they fail. And the culture of innovation that has sprouted up so many amazing industries, and created so many new discoveries in our country is directly related to the fact that we have a system that allows people to fail and get a fresh start. Now, is it fun? Absolutely not. Is it challenging? Does it hurt a lot of people sometimes? Yes, but compared to the alternative. Suppose, all of your debts stayed with you forever until you paid them off, would we encourage people to take risks, and to innovate? No, absolutely not. And there are countries in this world where that is the case. So, bankruptcy is awesome, the fact that we have it shows tremendous foresight on the part of the framers of this country and the Constitution. Now, obviously it's not a lot of fun, but in this lesson we're going to talk about some of the key terms, and foundations of bankruptcy, and what a bankruptcy procedure looks like. In future lessons, we'll talk about some more specifics of the various forms of bankruptcy and some key concepts. So, what are the terms we need to know? First, the bankruptcy code. As I mentioned, bankruptcy is enshrined in the Constitution and therefore, it is strictly a matter of federal law. The bankruptcy code is a set of federal statutes that govern bankruptcy and how it works. Bankruptcy courts are specialized courts that only handle matters of bankruptcy, and you can think of them sort of if a federal courthouse is a building with multiple stories, and the trial courts, otherwise known as the district court, is on the first floor. And then, when you appeal from the trial court, you go up to the second floor, and that's the appellate court also known as a circuit court. And then if you appeal from the circuit court, you go to the Supreme Court that's in the penthouse. We can think of the bankruptcy court as being in the basement. So, the bankruptcy court is a level below the trial court. If you appeal something from the bankruptcy court, it usually goes to a trial court, and then can work its way up from there. So, bankruptcy court's, special forms of courts, created just to handle bankruptcy matters. Now, the next concept is called the bankruptcy estate. Now, this truly is a new concept that you may not have ever heard before. We've heard the word estate in other context, forget all that. The bankruptcy estate is this new entity that springs to life the minute you file your bankruptcy case in the bankruptcy court. And the estate is this thing that owns all of your stuff while you're going through bankruptcy. So, you file a bankruptcy case, and all of a sudden, you don't own your stuff anymore, your stuff is owned by the estate, and we'll see why that's important as we go along. And then finally, there's this person called the bankruptcy trustee. The bankruptcy trustees' job is to oversee and administer the estate. So, since you don't own your stuff anymore, somebody has to take care of it, and that person is what we call the trustee. Now, the way a bankruptcy case moves through the court varies a little bit depending on which type of bankruptcy chapter you're utilizing, but as a general rule we can say some things that apply to most bankruptcy cases. Now, for individuals, usually individual debtors, not business debtors but individual debtors, are required to complete some counseling both before and after they file their bankruptcy case as counseling must be provided by an approved provider blah, blah, blah those kind of stuff, but is basically to help increase financial literacy so that we hopefully don't see this same individual back here again in bankruptcy court in a few years down the road. Now, after any pre-petition counseling has occurred, the real meat of a bankruptcy case starts with the filing of what we call a petition. The bankruptcy petition creates the bankruptcy estate, starts a new matter in bankruptcy courts, and the petition is a very long document. It basically sets out all the relevant information about the debtor, all their debts, who are the creditors, what's their contact information, how much they're owed, what's the debtor's income, assets, liabilities, all that kind of stuff. It's a very long document, and that's what starts a bankruptcy case in bankruptcy court. Now, I mentioned that the petition creates the bankruptcy estate, and it also triggers one other thing that's pretty cool if you're the debtor, and that's what's called the automatic stay. The moment you file your bankruptcy petition, the automatic stay goes into effect, and what that says is that, "Any creditors who are currently engaged in any efforts to try to collect money from you have to stop," The automatic stay immediately stops all collections efforts, whether they're in court, from collections agencies, anything. Once the automatic stay is in effect, it all has to stop. Why? Because before bankruptcy, the only way for your creditors to get money from you was by suing you or other collections efforts, but now we have bankruptcy. And there's a nice, orderly way that creditors can interact with you, to try and get paid. So, forget all that other stuff. Let's just do it in bankruptcy, that's why we have the automatic stay. So, then after the petition is filed, were eventually going to have to have a meeting of the creditors and they'll have to sometimes file what we call proof of claims. So, the creditors will have to say, "Yes. This is how much I'm owed, here's a proof that I'm owed this much." The creditors get together depending on the chapter of bankruptcy we're talking about for various purposes. And then, eventually, if we're in a liquidation type of bankruptcy, the trustee will gather up all of the assets of the debtor, it's called marshaling the assets, and then sell them, this is called liquidation. And then, pay the proceeds out to all the creditors. That's in a liquidation bankruptcy. In other types of bankruptcies like a Chapter 11, Chapter 13, which we'll talk about in a future lesson, there's no liquidation but instead there's a plan. The debtor and creditors sometimes come up with a plan of repayment or reorganization. The bankruptcy court will approve a plan. Once the liquidation has happened, or the plan has been approved and complied with, then the debtor can be discharged from their debts. This is the great thing about bankruptcy. You can receive discharge from debts meaning, I owe this much, and I don't have to pay it back. Now, discharge of debts is a great thing but unfortunately, some debts cannot be discharged in bankruptcy. And the one that really bums me out and might bum you out too is the fact that student loans are non-dischargeable in bankruptcy. So, you can go through bankruptcy, come out the other side, and still have to pay your student loans back, unless you can prove some extreme hardship, which is very hard to do. So student loans are non-dischargeable, unscheduled debts also non-dischargeable. If you don't put a debt in the petition, the court basically says, "We didn't know about it, so we can't discharge it." So, you have to schedule all of your debts in a petition. Almost all money owed to the government like taxes fees, that kind of thing is non-dischargeable, you got to pay your taxes. Domestic support obligations, child support, spousal support, alimony, those unpaid amounts for those sorts of things are usually non-dischargeable. And also, interestingly, money owed for willful, or malicious injury, fraud or theft is not dischargeable, but it wasn't always this way. And we'll see why in the next lesson. Now, once you receive your discharge or you're about to receive your discharge, debtors actually have the option in some instances to what we call reaffirm certain debts. So, you might have a debt that you could have discharged but you don't want it discharged, you would like to pay it. Maybe it's because the debt is secured by some collateral and you want to keep that collateral. So, you agree to reaffirm that debt if the lender agrees so that you can keep the collateral and continue making payments on that debt.
