Bankruptcy Laws

Where do Bankruptcy Laws come from?

Definition of Bankruptcy

Bankruptcy- The statutory procedure, usually triggered by insolvency, by which a person is relieved of most debts and undergoes a judicially supervised reorganization or liquidation for the benefit of that person’s creditors. – Black’s Law Dictionary, Seventh Edition.

The U.S. Constitution

Article 1, Section 8.4 of the Constitution gives the Federal Congress the power to “establish… uniform laws on the subject of bankruptcies throughout the United States.”  With this power, congress has created the “Bankruptcy Code” which contains the Bankruptcy Law that we use today.

The United States Bankruptcy Code

The Bankruptcy Code is a federal statute contained in Title 11 of the United States Code.  This “code” or law, governs all the rules about how our Bankruptcy System works.  When there are disputes about this code, judges will decide how the code should be used.  The code is broken down into Chapters, which is why we have “Chapter 7 Bankruptcy” and “Chapter 13 Bankruptcy,” etc.

Bankruptcy Courts

Bankruptcy Courts are special federal district courts set up to handle only Bankruptcy cases.  Bankruptcy judges are federal judges appointed for a term of 14 years by the U.S. Court of Appeals for which that particular Court sits.

State Bankruptcy Laws

States cannot create their own Bankruptcy Laws, because all Bankruptcy law is federal law.  However, states may create “exemption laws” which regulate the relationship between creditors and debtors in their state, and determine which assets a creditor may not take from a debtor.  In many states, you can choose to use either the state exemption laws or the federal exemption laws.

United States Trustee

The United States Trustee Program is a federal agency within the Department of Justice.  This agency’s job is to oversee Bankruptcy cases, look for Bankruptcy fraud, and to appoint and regulate private bankruptcy trustees to administer Chapter 7 Bankruptcy cases.  When the U.S. Trustee finds evidence of bankruptcy crimes, it will refer the case to the United States Attorney General for prosecution.

The Bankruptcy Chapters:

Chapter 7

Chapter 7 Bankruptcy is the most common form of Bankruptcy.  The debtor does not set up any kind of payment plan to pay creditors.  The debts are simply cleared away.  If there are any non-exempt assets (there usually are not), they are sold by the trustee for the benefit of the creditors.  A Chapter 7 can be filed by an individual or a business.

Chapter 9

This is a rare form of Bankruptcy used for the Adjustment of Debts of a Municipality (so when a city has to file for Bankruptcy).  It allows the city to restructure its debts.

Chapter 11

This Chapter of Bankruptcy is primarily used by a business to restructure or reorganize its debts and keep operating.  The benefits of filing a Chapter 11 include: the automatic stay, where creditors have to put on hold litigation against the corporation; permission by the court to get out of certain contracts; and the ability of the corporation to get new loans that give the new lenders a right over other lenders to business earnings.

Chapter 12

Chapter 12 Bankruptcy is only available to family farmers and family fishermen.  It is similar to Chapter 13, in that it allows a debtor to keep their property, and work out a repayment plan with their creditors.

Chapter 13

Chapter 13 Bankruptcy is available for a family or individual with regular income.  It allows you to keep all of your property, but you must do a 3-5 year payment plan to your creditors that is supervised by the court.  You don’t always pay all your unsecured creditors in the payment plan.  One big advantage of filing Chapter 13 is that it will stop a foreclosure.  You can then resume regular payments and pay off the arrearages over the course of the payment plan.  Another advantage is that you can sometimes get a cram down of your auto loan debt, meaning that you only pay back what the car is worth.

The New Bankruptcy Law

2005 Bankruptcy Abuse Prevention and Consumer Protection Act,
also called “BAPCPA,” or the “New Bankruptcy Law,” is the latest change to the Bankruptcy Code, passed by a Republican dominated congress and signed into law by President George Bush in 2005.  In this website’s opinion, the name of this law is deceptive.  It does not prevent “Bankruptcy Abuse,” nor is it a “Consumer Protection Act.”

Credit Counseling and the Means Test

The new law has lots of changes, but there are two major changes affecting consumers:  The first one is that a debtor must now take a credit counseling course before they can file for Bankruptcy, and they must take a “Financial Management Course” before they can receive a discharge.  The second major change is that a debtor must now qualify to file for Chapter 7 Bankruptcy by passing a “means test.”  In practice, the credit counseling requirement is easy (it can be done on the internet in about an hour), and most people in need still qualify for Chapter 7.  The law did however increase the cost of doing a Bankruptcy, because there is more work for your lawyer, and the filing fee was raised.