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The first federal bankruptcy law was repealed by Congress just three years later.[4] A decade later, the U.S. Supreme Court confirmed that the Bankruptcy Clause does not vest exclusive power in Congress,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for the States.[5] It was not until 1841 that Congress enacted another bankruptcy law, ch. 9, 5 Stat. 440, and then repealed it less than two years later, ch. 82, id., at 614.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the debts it caused led Congress to pass another bankruptcy law in 1867, ch. 176, 14 Stat. 517, but that was likewise repealed after just over a decade, ch. 160, 20 Stat. 99.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. Depending on the bankruptcy code, there may be local rules requiring a motion and adherence to certain procedures in order to convert a status from one chapter to another.

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 as an individual person, 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. Moreover, an individual debtor having mostly consumer debts must file a certificate of counseling.

A business debtor would file for bankruptcy where it is organized or maintains its principal place of business or principal assets.

The debtor must file with the court:

(1) schedules of assets and liabilities; (2) a schedule of current income and expenditures; (3) a statement of financial affairs; and (4) a schedule of executory contracts and unexpired leases. Fed. R. Bankr. P. 1007(b).[6]

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

As of 2023, the fees are "a $245 case filing fee, a $75 miscellaneous administrative fee, and a $15 trustee surcharge. Normally, the fees must be paid to the clerk of the court upon filing."[6]

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 11 filings are more expensive than Chapter 7: "The courts are required to charge a $1,167 case filing fee and a $571 miscellaneous administrative fee." There are also additional requirements for filing documents in a Chapter 11 bankruptcy.

In Chapter 11 filings, the debtor remains in control of the assets and can institute adversary proceedings to seek recovery of additional assets:

Once a voluntary Chapter 11 bankruptcy petition is filed, the debtor usually assumes the role of “debtor in possession,” meaning that the debtor keeps control of its assets during the Chapter 11 proceedings. A debtor in possession has the position of a fiduciary. Most frequently, the debtor in possession operates the business, performing many of the tasks that would be performed by the trustee if another type of bankruptcy were filed. These tasks may include accounting for property, filing information reports, examining creditors’ claims and objecting to them as appropriate, filing tax reports, and filing a final accounting. The debtor [in] possession is permitted to employ professionals such as attorneys, accountants, and appraisers.[7]

A U.S. Trustee will monitor the debtor in possession's compliance. In some cases, however, a trustee is appointed for cause, and the trustee administers the debtor's Chapter 11 case.

Small business

As explained by the US Courts website:[8]

The Bankruptcy Code allows small business debtors to file for relief under two different special categories of chapter 11 intended to streamline processes and reduce costs. The first, referred to as a small business case (by definition in 11 U.S.C. § 101(51C)), was created in 2005 by the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA), and the second, referred to as subchapter V, was created in 2019 by the Small Business Reorganization Act (SBRA). A debtor may elect either of these two options based on certain eligibility criteria. Both ... are treated differently than a traditional chapter 11 case primarily due to accelerated deadlines and the speed with which the plan is confirmed. The two types of cases have different debt limits, defined as the total amount of noncontingent liquidated secured and unsecured debt at the time the debtor files their bankruptcy case.

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.

Sources

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).
  6. 6.0 6.1 https://www.uscourts.gov/services-forms/bankruptcy/bankruptcy-basics/chapter-7-bankruptcy-basics
  7. https://www.justia.com/bankruptcy/chapter-11/
  8. https://www.uscourts.gov/services-forms/bankruptcy/bankruptcy-basics/chapter-11-bankruptcy-basics