Bankruptcy Code
United States Constitution has placed the matter of bankruptcy under Federal jurisdiction in its Article 1, Section 8. US Congress enacts uniform laws on bankruptcy applicable throughout the United States. Implementation of these laws is found in Statutes which are incorporated in a bankruptcy code. This Bankruptcy Code is located at Title 11 of the United States Code.
In many places, Federal law is either silent or expressly defers to state law. In such places, state law amplifies Bankruptcy Code.
Thus, keep in mind that validity of bankruptcy claims and exemptions are dependent to a large extent on state laws. So generalizing bankruptcy issues across state lines is not advisable. If you want to file a bankruptcy case, you need to go to a United States bankruptcy court which is units of the United States district courts. Here, we will briefly examine the major points of the bankruptcy code.
Main Chapters of the bankruptcy Code:
Title 11 has a long list of Chapters. Some Chapters provide different procedures for debt resolution while others are more generalized in nature. Thus, several types of proceedings fit under the category of bankruptcy.
Chapter 7 Liquidation: This is the most common form of bankruptcy. A debtor asks for liquidation of his/her debts through a Chapter 7 filing.
Chapter 9 Reorganization for municipalities: Chapter 9 bankruptcy is applicable only to municipalities. In Chapter 9, debt of a municipality is reorganized, not liquidated.
Chapter 11, 12 and 13 Reorganization: Bankruptcy under these three Chapters of Title 11 i.e. Chapter 11, Chapter 12 and Chapter 13 represent a somewhat complex reorganization process. Under these Chapters, a debtor is allowed to keep some or all of his/her property if he/she presents a reorganization plan detailing how the future earnings of the debtor will be used to pay off the creditors. Individuals usually file for either Chapter 7 or Chapter 13. Though an individual is allowed to file for Chapter 11 also, such cases are rare. As far as Chapter 12 is concerned, its more or less similar to Chapter 13 but is available, in certain situations, only to family farmer and family fisherman.
Chapter 15 Cross-border insolvency: Chapter 15 has been added recently through the Bankruptcy Abuse Prevention & Consumer Protection Act of 2005, and has replaced Section 304. Chapter 15 deals with foreign companies with US debts i.e. cross-border insolvency.
Major features of the bankruptcy code:
Creation of estate Once a bankruptcy case commences, it creates an estate consisting of all the properties of the debtor subject to certain exemptions. In case of a married person, this estate may include certain property interests of the debtors spouse also, irrespective of whether the spouse has filed for bankruptcy or not.
If an individual has filed a Chapter 7 or Chapter 11 case, his/her bankruptcy estate will be treated as a separate taxable entity for federal income tax purposes. If an individual files Chapter 12 or Chapter 13, and in case of a corporation and a partnership, the bankruptcy estate is not treated as a separate taxable entity.
Nature of bankruptcy court United States Bankruptcy Court is a unit of the applicable United States district court whose judge is appointed by the United States Court of Appeals for the circuit in which the applicable district is located. The judges term is fourteen years.
Most district courts have a standing reference order stating that all bankruptcy cases in that district will be handled by the bankruptcy court. However, in unusual circumstances, the district court may withdraw this standing reference for a particular case and may decide that particular case itself.
If not satisfied with the decision of the bankruptcy court, you can appeal to the district court and then to the Court of Appeals. In certain jurisdictions, there is a bankruptcy appellate panel comprising of bankruptcy judges to hear certain appeals from bankruptcy courts.
The automatic stay bankruptcy code imposes an automatic stay on the collection activities of the creditors the moment a bankruptcy petition is filed. Without the protection of this automatic stay, creditors may think of racing to the courthouse themselves just to improve their position against the debtor. So even if a debtor is facing only temporary financial crunch and can very well turn things around in a given time period, if the creditors started reaching the courthouse at the slightest hint of financial difficulty, the debtor may not survive even an otherwise salvageable situation. Once the automatic stay is imposed, not only all the collection activities of the unsecured creditors will be stopped, but secured creditors will also have to take the prior permission from the court before taking the applicable collateral from the debtor.
The creditors Talking of creditors, as already mentioned, secured creditors can take away the collateral to their loan after taking permission from the court.
Unsecured creditors are divided in to two classes unsecured priority creditors and general unsecured creditors. As is self-evident from the names of these classes, after secured creditors, unsecured priority creditors will be paid before paying anything to the general unsecured creditors. If the assets of the bankruptcy estate prove insufficient to pay all the unsecured priority creditors, in such cases the general unsecured creditors will end up getting nothing.
Exempt property Theoretically speaking, all the property of the debtor not excluded from the estate under the bankruptcy code becomes the property of the state once the case commences. However, an individual debtor (but not a partnership, corporation or such collective entities) may claim certain items of the property as exempt and can keep those items, provided those items had not been pledged as collateral to any creditor.
These exemption laws vary from state to state. Exempt property generally includes equity in home or car, tools of trade and maybe some personal effects. These exemptions are provided on the basis of the premise that the main purpose of bankruptcy is the orderly management of debt. Thus exemptions given to items such as personal care items, ordinary clothing and such personal effects prevent unnecessary seizures of items having little or no economic value. Similarly, tools of the trade may be exempted because their continued possession will allow the insolvent debtor to once again move towards productive work as early as possible.
Thus, the key feature of the bankruptcy code is to help the debtor in making a fresh start. However, bankruptcy is a major decision likely to greatly impact not only your financial, but also personal life. And therefore, it is to be thought of only when all the efforts to get the financial situation under control have failed to yield the desired results.
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