The Process of Bankruptcy and How It Works

WASHINGTON - OCTOBER 20:  Volunteers unfurl a ...

WASHINGTON - OCTOBER 20: Volunteers unfurl a giant banner printed with the Preamble to the United States Constitution during a demonstration against the Supreme Court's Citizens United ruling at the Lincoln Memorial on the National Mall October 20, 2010 in Washington, DC. The rally at the memorial was organized by brothers Laird and Robin Monahan who spent the last five months walking from San Francisco, California, to Washington to protest the court decision, which overturned the provision of the McCain-Feingold law barring corporations and unions from paying for political ads made independently of candidate campaigns. (Image credit: Getty Images via @daylife)

The United States Constitution, under Article 1, Section 8, authorized Congress to enact “uniform laws on the subject of Bankruptcy.” The laws have evolved over the years, and the Bankruptcy Code was instituted in 1978, codified under title 11 of the United States Code. It has since been amended several times since its enactment and is the federal law that governs the process of  bankruptcy cases today.

The process of bankruptcy is governed by the Federal Rules of Bankruptcy Procedures (FRBP) along with local rules from each bankruptcy court. The FRBP establishes what official forms are to be used in bankruptcy cases, and the legal procedures for the handling in bankruptcy court the various debt problems of individuals and businesses.

There are 90 bankruptcy districts located across the United States and its territories, and each state or territory has one or more districts. Each district has one bankruptcy court per district. These courts have the power to make decisions over all federal bankruptcy cases. They include a bankruptcy judge, an appointed U.S. bankruptcy trustee, case trustees, a bankruptcy court clerk, and various other supporting personnel.

There are six basic types of bankruptcies the courts serve to adjudicate the laws of bankruptcy. These are:

  1. Chapter 7– The simplest kind of bankruptcy where the trustee liquidates non-exempt assets to pay off unsecured debt. Individuals, partnerships, and corporations can file this type of bankruptcy.

  2. Chapter 13– A bankruptcy where the debtor makes a 3 or 5 year plan to pay off all or a part of their unsecured debt. It is often called a wage earner’s plan and is for individuals and partnerships.

  3. Chapter 11– This bankruptcy is a type of reorganization plan specifically designed for a business to reorganize its debts and assets to pay off its unsecured creditors, while discharging others.

  4. Chapter 12– This bankruptcy is specifically designed for family farmers and commercial fishermen who are in business and have a regular income from their business. The debtors make a 3 or 5 year plan to pay back a part or all of unsecured debts.

  5. Chapter 9– This bankruptcy is designed specifically for municipalities who are having debt problems. It provides for financial reorganization of the municipality and can include municipalities that are cities, towns, villages, counties, taxing districts, municipal utilities, and school districts.

  6. Chapter 15– This bankruptcy is designed to provide a jurisdiction for bankruptcies dealing with cases of cross-border insolvency. These cases involve debtors where the debtors or its property is subject to the laws of the United States and one or more foreign countries.

The overwhelming fundamental goal of the federal bankruptcy laws, according to the Supreme Court, is to give debtors a financial fresh new start from burdensome debts.

The process of bankruptcy is complex and relies on legal concepts as stated in the federal and state statutes that govern it. These concepts are sometimes hard for laymen to understand. The process, therefore, often requires that debtors who do not understand its complexity to consult with trained and experienced bankruptcy lawyers to accurately maneuver the system.

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