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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.

Recent Cases:

In Czyzewski 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.

BANKRUPTCY RESOURCES

Federal Materials
State Materials
Other Resources

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