Bankruptcy Basics: A Primer

Summary

U.S. bankruptcy law has two central aims. First, bankruptcy law seeks to relieve debtors of certain obligations they are unable to repay by providing them with a “fresh start” from financial difficulties. At the same time, bankruptcy law attempts to preserve the countervailing interests of creditors and other stakeholders by maximizing total creditor return in an orderly and efficient fashion. Congress and the courts have established a complex system of statutes, procedural rules, and judicial precedents intended to balance these competing interests.

Various types of debtors—from individual consumers with modest incomes to the largest multinational corporations—may potentially encounter difficulty repaying their debts. To accommodate the differing needs of such debtors, the Bankruptcy Code—which is the primary source of bankruptcy law in the United States—contains a variety of “Chapters” which create several different forms of bankruptcy proceedings. Although the end goal of each of those proceedings is to balance the conflicting interests of debtors, creditors, and other stakeholders, each Chapter has its own procedures, eligibility requirements, and forms of relief. Whereas some Chapters aim to liquidate the debtor, others attempt to reorganize the debtor so that it may continue to operate as a going concern, while still others adjust the debtor’s debts.

This report serves as a primer for Members and their staffs on the basics of U.S. bankruptcy law. The report provides a brief overview of the most essential concepts necessary for an informed understanding of the U.S. bankruptcy system, including

the competing policies underlying the Bankruptcy Code;

the sources of bankruptcy law;

the organization of the Bankruptcy Code;

the key players in a bankruptcy proceeding;

the initiation of a bankruptcy case;

the “automatic stay” of creditor actions against the debtor;

the various types of proceedings established by different Chapters of the Bankruptcy Code, as well as the differences between those proceedings; and

the “discharge” of debt.