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bankruptcy

Overview:

Bankruptcy law  provides for the reduction or elimination of certain debts , and can provide a timeline for the repayment of nondischargeable debts  over time. It also permits individuals and organizations to repay secured debt . Generally, secured debt is debt with real estate  or personal property  like vehicles pledged as collateral --often on terms more favorable to the debtor .

Federal  bankruptcy law is contained in Title 11  of the U.S. Code . Congress  passed the Bankruptcy Code  under its constitutional grant of authority  to "establish... uniform laws on the subject of Bankruptcy throughout the United States." The grant of authority is under U.S. Constitution Article I, Section 8 . States  may not regulate bankruptcy, but they may pass laws  that govern other aspects of the relationship between the debtor and creditor . A number of sections of Title 11  incorporate the debtor-credit law of the individual states.

Bankruptcy proceedings  are supervised by and litigated  in Bankruptcy Court , which is part of the Federal District Court system . Congress established the U.S. Trustee Program  to oversee the administration of bankruptcy proceedings, and authorized the U.S. Supreme Court  to promulgate the Federal Rules of Bankruptcy Procedure .

Types of Bankruptcy:

Chapter 7

Chapter 7  provides for the discharge  of unsecured debt , such as debt from credit cards and personal loans . Secured debt  is typically unaltered, meaning that the collateral  securing the debt remains in the debtor’s possession  as long as timely payments are made. Chapter 7 is always available to corporations  and individuals with primarily business  debt. Otherwise, individuals cannot file  a Chapter 7 petition  unless they meet certain income  requirements.

Chapter 9

Chapter 9  governs the reorganization of municipalities  and related local entities , such as county-owned hospitals and school districts. Individuals and corporations cannot file for bankruptcy under Chapter 9.

Chapter 11

Chapter 11  is the most comprehensive chapter of the Bankruptcy Code ; it provides several options to reorganize debt, e.g., by repaying some debts, discharging others, and restructuring the remainder. Although individuals may file for Chapter 11 relief, the relatively high filing fees and administrative costs lead most individuals to favor Chapter 7  or Chapter 13  bankruptcy proceedings .

Chapter 12

Chapter 12  provides for the restructuring of debt for family farmers. Only family farmers (as defined in Sec. 101  of Title 11 ) are eligible and, though not analogous, it shares many characteristics with a Chapter 13  proceeding .

Chapter 13

Chapter 13  permits the discharge of some debt, as well as the repayment of other debt over a period of three to five years. It may also permit a reduction in principal  owed on secured debt , or the elimination of these debts altogether. It can also be used to structure a repayment plan for debt that cannot be discharged in bankruptcy. Only individuals may file under this chapter, and there are some limited income  and debt qualifications.

Generally, recent tax  debt as well as child support , criminal  restitution , and student loans will not be discharged in bankruptcy unless they are repaid in full by the debtor  during the course of the proceeding .

Individuals are permitted to keep certain assets  without regard to the type of bankruptcy sought. For example, Individual Retirement Accounts (IRAs)  are protected under § 522(d)  of Title 11  and thus cannot be involuntarily used to repay creditors  in a bankruptcy. Varying levels of home equity  are also often protected, as are personal vehicles in varying amounts.

Relevant Cases:

In C_zyzewski v. Jevic Holding Corp_. , the U.S. Supreme Court  held that "when a bankruptcy court  orders a Chapter 11  case  dismissed , it can't also order the distribution  of the debtor's assets in a way that contradicts the order of payment in a bankruptcy liquidation ."1  This is an affirmation of the Chapter 11  absolute priority rule, which stipulates the order of payment in a liquidation . Compare to the 2009 Chapter 11  bankruptcy filing of General Motors , in which the absolute priority rule was not followed.2

In Midland Funding, LLC v. Johnson , the Court  ruled "that debt collectors can use bankruptcy proceedings  to try to collect liabilities  that are so old the statute of limitations  has expired."3  This result, however, is dependent on state law. In this case, the relevant state law provides that a creditor has the right to payment of a debt even after the statute of limitations has expired, according to the Court 's opinion .

Stern v. Marshall  was a complex and high-profile case involving the estate  of the defendant 's late husband, and eventually her own bankruptcy. Anna Nicole Smith, a.k.a. Vickie Marshall, filed  for bankruptcy in California while the estate case was open in a Texas probate court . The bankruptcy court 's decision  included a judgment  on a counterclaim  that Marshall made against the plaintiff , which was otherwise unrelated to the bankruptcy. Although state law allowed the bankruptcy court  jurisdiction  in this situation, the U.S. Supreme Court held that it was an unconstitutional exercise of jurisdiction. Essentially, bankruptcy courts have very limited jurisdiction .

The Stern  precedent  was relevant years later in Executive Benefits Insurance Agency v. Arkison , in which the Court held that, under Stern 's reasoning, it is unconstitutional for a bankruptcy court to enter a final judgment  on a bankruptcy-related claim . It may, however, issue proposed findings of fact  and conclusions of law , which are to be reviewed  de novo  by the district court .

1 Stephen J. Lubben, Supreme Court Ruling Draws a Vague Line in Bankruptcy Cases, N.Y. Times

2 Daniel Fisher, Supreme Court Leaves GM Vulnerable to Pre-Bankruptcy Ignition Suits, Forbes

3 Greg Stohr and Dawn McCarty, Supreme Court Backs Bids to Collect Outdated Debt in Bankruptcy, Bloomberg Politics

BANKRUPTCY RESOURCES

Federal Materials

• Title 11  of the U.S. Code  - Federal Bankruptcy Code

  • Chapter 1  - General Provisions, Definitions, and Rules of Construction
  • Chapter 3  - Case Administration
  • Chapter 5  - Creditors, the Debtor, and the Estate
  • Chapter 7  - Liquidation
  • Chapter 9  - Adjustment of Debts of a Municipality
  • Chapter 11  - Reorganization
  • Chapter 12  - Adjustment of Debts of a Family Farmer or Fisherman with Regular Annual Income
  • Chapter 13  - Adjustment of Debts of An Individual With Regular Income
  • Chapter 15  - Ancillary and Other Cross-Border Cases

• 28 CFR Part 58  - Regulations Relating to the Bankruptcy Reform Acts of 1978 and 1994

• Federal Rules of Bankruptcy Procedure

• Official Bankruptcy Forms  (uscourts.gov)

• Federal Bankruptcy Courts - By State

State Materials

• State Civil Codes

Other Resources

• U.S. Trustee Program  (justice.gov)
• American Bankruptcy Institute  (abi.org)

[Last reviewed in June of 2022 by the Wex Definitions Team
]

Keywords

• bankruptcy

• BANKRUPTCY CODE

• [bankruptcy courts](https

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