Bankruptcy Code

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The Bankruptcy Code is an informal name for Title 11 of the United States Code (11 U.S.C. §§ 101-1330), which serves as the federal bankruptcy law. Currently there are several types of bankruptcies which are referred to by their respective chapters. All bankruptcies are filed in a federal court called the United States Bankruptcy Court, which will supervise such cases to termination.

History

Article I, § 8, cl. 4, of the U.S. Constitution provides that Congress shall have the power to establish "uniform Laws on the subject of Bankruptcies throughout the United States."

A primary motivation for this clause was the interest in avoiding unjust imprisonment for debt and making federal discharges in bankruptcy enforceable in every State was a primary motivation for the adoption of that provision. But it extends broader than that, covering the entire "subject of Bankruptcies."

The Supreme Court has thus held that the power granted to Congress by that Clause is a unitary concept rather than an amalgam of discrete segments.[1]

However, for over a dozen years after the ratification of the Constitution, Congress failed to adopt a single bankruptcy law.[2] It was not until April 4, 1800, that the Sixth Congress finally adopted our Nation's first bankruptcy law, ch. 19, 2 Stat. 19, a law that left plenty of room for state law, § 61, id., at 36.[3]

The first federal bankruptcy law was repealed by Congress just three years later.[4] A decade later, the U.S. Supreme Court confirmed that the Bankruptcy Clause does not vest exclusive power in Congress, but instead leaves an important role for the States.[5] It was not until 1841 that Congress enacted another bankruptcy law, ch. 9, 5 Stat. 440, and then repealed it less than two years later, ch. 82, id., at 614. The Civil War and the debts it caused led Congress to pass another bankruptcy law in 1867, ch. 176, 14 Stat. 517, but that was likewise repealed after just over a decade, ch. 160, 20 Stat. 99.

Bankruptcy Code Chapters

Each different type of bankruptcy is covered under a different Chapter of the Code.

Although a bankruptcy may be filed under one chapter (either by the debtor or the creditors), the other party may seek to have the bankruptcy changed ("converted") to one under a different chapter. For example, a business may seek reorganization under Chapter 11, but its creditors (believing that the business has no chance of survival) may petition a conversion to Chapter 7.

Chapter 7

A Chapter 7 bankruptcy provides for the total "liquidation" of the debtor's assets (the sale of a debtor's nonexempt property and the distribution of the proceeds to creditors).

In order to be eligible for Chapter 7, the debtor must satisfy a means test, whereby the court will evaluate the debtor's income and expenses to determine if the debtor may proceed under Chapter 7.

Chapter 7 bankruptcies are most common in the business realm, whereby a business declares total insolvency and seeks to cease doing business forever.

Chapter 9

A Chapter 9 bankruptcy is limited to governmental entities such as cities, counties, school districts, and other local entities. Notably, states and territories are not permitted to file under this Chapter (as such, the ongoing Puerto Rico debt crisis cannot be resolved under this Chapter).

Chapter 11

A Chapter 11 bankruptcy provides for "reorganization" of a debtor's finances.

Chapter 11 bankruptcies are the most common among businesses. Individuals can file under Chapter 11 as well (and must do so if their debts exceed the limits for filing under Chapter 13), but as this option is more expensive and time-consuming, individuals who can use Chapter 13 usually choose that option instead.

Chapter 12

A Chapter 12 bankruptcy is a special provision in the Code limited to individuals who are family farmers or fishermen.

Chapter 13

A Chapter 13 bankruptcy also provides for reorganization. This chapter is limited to individuals only having debts not exceeding a specified limit.

Chapter 15

Chapter 15 deals with special cases involving cross-border insolvency.

References

  1. Cent. Va. Cmty. College v. Katz, 546 U.S. 356 (2006).
  2. See, e.g., 9 Annals of Congress 2671 (1799) (noting that Congress had "not ... passed [bankruptcy legislation] for these ten years past, and the States [have] legislated upon it in their own way" (statement of Rep. Baldwin)); 3 Farrand's Debates 380 (same).
  3. In contrast, the very first Congress enacted other sweeping legislation including, inter alia, patent and copyright legislation. 1 Stat. 109, 124.
  4. 2 Stat. 248.
  5. See Sturges v. Crowninshield, 17 U.S. 122, 4 Wheat. 122, 4 L. Ed. 529 (1819).

Sources