Options for Bankruptcy Relief
Bankruptcy gives financially distressed persons and
businesses a financial “fresh start” from burdensome debts.
When I tell people that one of my areas of practice is
bankruptcy, they sometimes ask me for basic information about the bankruptcy
process. In this article, I give a brief explanation of bankruptcy.
Article I, Section 8, of the United States Constitution
authorizes Congress to enact uniform Laws on the subject of Bankruptcies.
The Bankruptcy Code, which is codified as Title 11 of the United States Code and
has been amended several times since its enactment, is the uniform federal law
that governs all bankruptcy cases.
A fundamental goal of bankruptcy laws is to give debtors a
financial fresh start from burdensome debts. The Supreme Court made this point
about the purpose of the bankruptcy law in its 1934 decision in Local Loan Co.
[I]t gives to the honest but unfortunate debtor ... a new
opportunity in life and a clear field for future effort, unhampered by the
pressure and discouragement of preexisting debt.
This goal is accomplished through the bankruptcy discharge,
which releases debtors from personal liability from specific debts and prohibits
creditors from ever taking any action against the debtor to collect those debts.
Bankruptcy cases are heard in bankruptcy courts, and there is a
bankruptcy court for each judicial district in the country. Each state has one
or more districts. In Arizona there is one district, with
bankruptcy court locations in
Phoenix, Tucson, Yuma, Flagstaff and Bullhead City.
The court official with decision-making power over federal
bankruptcy cases is the bankruptcy judge, a judicial officer of the U.S.
district court. The bankruptcy judge may decide any matter connected with a
bankruptcy case, such as eligibility to file or whether a debtor should receive
a discharge of debts.
Much of the bankruptcy process is administrative, however,
and is conducted away from the courthouse. In cases under Chapters 7, 12, or 13,
and sometimes in Chapter 11 cases (all described below), this administrative
process is carried out by a trustee who is appointed to oversee the case.
A debtor’s involvement with the bankruptcy judge is usually very
limited. For example, a typical Chapter 7 debtor will not see the bankruptcy
judge unless an objection is raised in the case. Usually, the only formal
proceeding at which a debtor must appear is the meeting of creditors. This
meeting is informally called a 341 meeting. Section 341 of the Bankruptcy Code
requires that the debtor attend this meeting so that creditors, who often do not
show up at the meeting, can question the debtor about debts and property.
Types of Bankruptcy
The most common types of bankruptcy are Chapter 7 and Chapter 13
(for individuals) and Chapter 11 (primarily for businesses).
A Chapter 7 liquidation contemplates an orderly,
court-supervised procedure by which a trustee takes over the assets of the
debtor’s estate, reduces them to cash, and makes distributions to creditors,
subject to (a) the debtor’s right to retain certain exempt property and (b) the
rights of secured creditors.
Because there is usually little or no nonexempt property in most
Chapter 7 cases, there may not be an actual liquidation of the debtor’s assets.
These cases are called no-asset cases. In most Chapter 7 cases, if the debtor
is an individual, he or she receives a discharge that releases him or her from
personal liability for certain dischargeable debts. Also, the Bankruptcy Code
requires the application of a means test to determine whether individual
consumer debtors qualify for relief under Chapter 7. If such a debtor’s income
is in excess of certain thresholds, the debtor may not be eligible for Chapter 7
A Chapter 13 bankruptcy, often called a wage-earner
reorganization, is designed for an individual
debtor who has a regular source of income. Chapter 13 allows the debtor to keep
property and propose a plan to repay creditors over time (usually three to five
years). Chapter 13 is also used by consumer debtors who do not qualify for
Chapter 7 relief under the means test mentioned above.
The court either approves (confirms) or disapproves the debtor’s
repayment plan, depending on whether the plan meets the Bankruptcy Code’s requirements
for confirmation. If the plan is confirmed, the Chapter 13 debtor makes payments
to creditors, through the trustee, based on the debtor’s anticipated income over
the life of the plan. Unlike Chapter 7, in a Chapter 13 the debtor does not
receive an immediate discharge of debts; before the discharge is received, the
debtor must complete the payments required under the plan. While the plan is in
effect, the debtor is protected from lawsuits, garnishments and other creditor
Another type of reorganization, Chapter 11, ordinarily is
used by businesses and other commercial enterprises that wish to continue operating a business and
repay creditors concurrently through a plan of reorganization. The court
ultimately approves (confirms) or disapproves the plan of reorganization.
a confirmed plan, the debtor can reduce its debts by repaying some of its
obligations and discharging others. The debtor can also terminate burdensome
contracts and leases, recover assets, and rescale its operations in order to
return to profitability. Under Chapter 11, the debtor normally goes through a
period of consolidation and emerges with a reduced debt load and a reorganized
There are less common forms of bankruptcy, including these:
Chapter 12 provides debt relief to family farmers and fishermen with regular income. The process under Chapter 12 is very similar to
that of Chapter 13.
Chapter 9 provides essentially for reorganization of
counties, cities, towns, villages, taxing districts, municipal utilities, and
school districts. It is much like a reorganization under Chapter 11.
Chapter 15 deals with cases of cross-border insolvency
and applies, for example, where a debtor or its property is subject to the laws
of the United States and one or more foreign countries.
This broad introduction to bankruptcy offers general information
only. Anyone considering bankruptcy or who has questions about dealing with
debt problems should seek professional assistance to gain a full understanding
of their options, including alternatives to bankruptcy.
For further information, visit
www.uscourts.gov, which served as the foundation for this
article and is maintained by the Administrative Office of the U.S. Courts. The website provides information from and about the Judicial Branch of the U.S.
Government, including the bankruptcy courts.
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