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Bankruptcy BASICS Bankruptcy BASICS Administrative Office of the United States Courts Bankruptcy BASICS Bankruptcy Judges Division Administrative Office of the United States Courts November 2011 Revised Third Edition While the information presented is accurate as of the date of publication, it should not be cited or relied upon as legal authority. It should not be used as a substitute for reference to the United States Bankruptcy Code (title 11, United States Code) and the Federal Rules of Bankruptcy Procedure, both of which may be reviewed at local law libraries, or to local rules of practice adopted by each bankruptcy court. Finally, this publication should not substitute for the advice of competent legal counsel. Table of CONTENTS Introduction 5 The Discharge in Bankruptcy 9 Chapter 7. Liquidation Under the Bankruptcy Code 14 Chapter 13. Individual Debt Adjustment 22 Chapter 11. Reorganization Under the Bankruptcy Code 29 Chapter 12. Family Farmer or Family Fisherman Bankruptcy 43 Chapter 9. Municipality Bankruptcy 49 Chapter 15. Ancillary and Other Cross-Border Cases 57 SCRA. Servicemembers’ Civil Relief Act 60 SIPA. Securities Investor Protection Act 64 Bankruptcy Terminology 71 Bankruptcy Basics A Publication of the Bankruptcy Judges Division Introduction Bankruptcy Basics is designed to provide The Process basic information to debtors, creditors, court personnel, the media, and the general public Article I, Section 8, of the United States on different aspects of the federal bankruptcy Constitution authorizes Congress to enact laws. It also provides individuals who may be “uniform Laws on the subject of considering bankruptcy with a basic Bankruptcies.” Under this grant of authority, explanation of the different chapters under Congress enacted the “Bankruptcy Code” in which a bankruptcy case may be filed and to 1978. The Bankruptcy Code, which is answer some of the most commonly asked codified as title 11 of the United States Code, questions about the bankruptcy process. has been amended several times since its enactment. It is the uniform federal law that Bankruptcy Basics provides general governs all bankruptcy cases. information only. While every effort has been made to ensure that the information contained The procedural aspects of the bankruptcy in it is accurate as of the date of publication, it process are governed by the Federal Rules of is not a full and authoritative statement of the Bankruptcy Procedure (often called the law on any particular topic. The information “Bankruptcy Rules”) and local rules of each presented in this publication should not be bankruptcy court. The Bankruptcy Rules cited or relied upon as legal authority and contain a set of official forms for use in should not be used as a substitute for bankruptcy cases. The Bankruptcy Code and reference to the United States Bankruptcy Bankruptcy Rules (and local rules) set forth Code (title 11, United States Code) and the the formal legal procedures for dealing with Federal Rules of Bankruptcy Procedure. the debt problems of individuals and businesses. Most importantly, Bankruptcy Basics should not substitute for the advice of competent There is a bankruptcy court for each judicial legal counsel or a financial expert. Neither the district in the country. Each state has one or Bankruptcy Judges Division nor the more districts. There are 90 bankruptcy Administrative Office of the United States districts across the country. The bankruptcy Courts can provide legal or financial advice. courts generally have their own clerk’s Such advice may be obtained from a offices. competent attorney, accountant, or financial adviser. The court official with decision-making power over federal bankruptcy cases is the United States bankruptcy judge, a judicial officer of the United States district court. The bankruptcy judge may decide any matter connected with a bankruptcy case, such as 6 eligibility to file or whether a debtor should prohibits creditors from ever taking any action receive a discharge of debts. Much of the against the debtor to collect those debts. This bankruptcy process is administrative, publication describes the bankruptcy however, and is conducted away from the discharge in a question and answer format, courthouse. In cases under chapters 7, 12, or discussing the timing of the discharge, the 13, and sometimes in chapter 11 cases, this scope of the discharge (what debts are administrative process is carried out by a discharged and what debts are not trustee who is appointed to oversee the case. discharged), objections to discharge, and revocation of the discharge. It also describes A debtor’s involvement with the bankruptcy what a debtor can do if a creditor attempts to judge is usually very limited. A typical collect a discharged debt after the bankruptcy chapter 7 debtor will not appear in court and case is concluded. will not see the bankruptcy judge unless an objection is raised in the case. A chapter 13 Six basic types of bankruptcy cases are debtor may only have to appear before the provided for under the Bankruptcy Code, each bankruptcy judge at a plan confirmation of which is discussed in this publication. The hearing. Usually, the only formal proceeding cases are traditionally given the names of the at which a debtor must appear is the meeting chapters that describe them. of creditors, which is usually held at the offices of the U.S. trustee. This meeting is Chapter 7, entitled Liquidation, contemplates informally called a “341 meeting” because an orderly, court-supervised procedure by section 341 of the Bankruptcy Code requires which a trustee takes over the assets of the that the debtor attend this meeting so that debtor’s estate, reduces them to cash, and creditors can question the debtor about debts makes distributions to creditors, subject to the and property. debtor’s right to retain certain exempt property and the rights of secured creditors. A fundamental goal of the federal bankruptcy Because there is usually little or no laws enacted by Congress is to give debtors a nonexempt property in most chapter 7 cases, financial “fresh start” from burdensome debts. there may not be an actual liquidation of the The Supreme Court made this point about the debtor’s assets. These cases are called purpose of the bankruptcy law in a 1934 “no-asset cases.” A creditor holding an decision: unsecured claim will get a distribution from the bankruptcy estate only if the case is an [I]t gives to the honest but unfortunate asset case and the creditor files a proof of debtor…a new opportunity in life and a clear claim with the bankruptcy court. In most field for future effort, unhampered by the chapter 7 cases, if the debtor is an individual, pressure and discouragement of preexisting he or she receives a discharge that releases debt. him or her from personal liability for certain dischargeable debts. The debtor normally Local Loan Co. v. Hunt, 292 U.S. 234, 244 receives a discharge just a few months after (1934). This goal is accomplished through the the petition is filed. Amendments to the bankruptcy discharge, which releases debtors Bankruptcy Code enacted in to the from personal liability from specific debts and Bankruptcy Abuse Prevention and Consumer 7 Protection Act of 2005 require the application court-approved plan of reorganization. The of a “means test” to determine whether chapter 11 debtor usually has the exclusive individual consumer debtors qualify for relief right to file a plan of reorganization for the under chapter 7. If such a debtor’s income is first 120 days after it files the case and must in excess of certain thresholds, the debtor may provide creditors with a disclosure statement not be eligible for chapter 7 relief. containing information adequate to enable creditors to evaluate the plan. The court Chapter 13, entitled Adjustment of Debts of ultimately approves (confirms) or disapproves an Individual With Regular Income, is the plan of reorganization. Under the designed for an individual debtor who has a confirmed plan, the debtor can reduce its regular source of income. Chapter 13 is often debts by repaying a portion of its obligations preferable to chapter 7 because it enables the and discharging others. The debtor can also debtor to keep a valuable asset, such as a terminate burdensome contracts and leases, house, and because it allows the debtor to recover assets, and rescale its operations in propose a “plan” to repay creditors over time order to return to profitability. Under chapter – usually three to five years. Chapter 13 is 11, the debtor normally goes through a period also used by consumer debtors who do not of consolidation and emerges with a reduced qualify for chapter 7 relief under the means debt load and a reorganized business. test. At a confirmation hearing, the court either approves or disapproves the debtor’s Chapter 12, entitled Adjustment of Debts of a repayment plan, depending on whether it Family Farmer or Fisherman with Regular meets the Bankruptcy Code’s requirements for Annual Income, provides debt relief to family confirmation. Chapter 13 is very different farmers and fishermen with regular income. from chapter 7 since the chapter 13 debtor The process under chapter 12 is very similar usually remains in possession of the property to that of chapter 13, under which the debtor of the estate and makes payments to creditors, proposes a plan to repay debts over a period through the trustee, based on the debtor’s of time – no more than three years unless the anticipated income over the life of the plan. court approves a longer period, not exceeding Unlike chapter 7, the debtor does not receive five years. There is also a trustee in every an immediate discharge of debts. The debtor chapter 12 case whose duties are very similar must complete the payments required under to those of a chapter 13 trustee.
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