Bankruptcy BASICS (Applicable to Cases Filed BEFORE October 17, 2005) Leonidas Ralph Mecham, Director Administrative Office of the United States Courts Bankruptcy BASICS Leonidas Ralph Mecham, Director Administrative Office of the United States Courts Bankruptcy BASICS Public Information Series Bankruptcy Judges Division Administrative Office of the United States Courts APRIL 2004 Revised Second Edition While the information presented in this pamphlet is accurate as of the date of pub- lication, 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 pamphlet should not substitute for the advice of competent legal counsel. For additional copies, please contact the Bankruptcy Judges Division, Administrative Office of the United States Courts, (202) 502-1900. Table of CONTENTS Introduction 1 The Discharge in Bankruptcy 5 Chapter 7.Liquidation Under the Bankruptcy Code 11 Chapter 13.Individual Debt Adjustment 18 Chapter 11.Reorganization Under the Bankruptcy Code 24 Chapter 12.Family Farmer Bankruptcy 38 Chapter 9.Municipality Bankruptcy 44 SIPA.Securities Investor Protection Act 53 Bankruptcy Terminology 61 Bankruptcy BASICS A Public Information Series of the Bankruptcy Judges Division THE PAMPHLET competent legal counsel or a financial The Bankruptcy Judges Division’s Public expert. Neither the Bankruptcy Judges Information Series pamphlet provides Division nor the Administrative Office basic information to debtors, creditors, of the United States Courts can pro- court personnel, the media, and the gen- vide legal or financial advice. Such eral public on different aspects of the advice may be obtained from a com- federal bankruptcy laws. The series is petent attorney, accountant, or finan- also designed to provide individuals who cial adviser. may be considering bankruptcy with a basic explanation of the different chap- THE PROCESS ters under which a bankruptcy case may Article I, Section 8, of the United States be filed and to answer some of the most Constitution authorizes Congress to commonly asked questions about the enact “uniform Laws on the subject of bankruptcy process. Bankruptcies.” Under this grant of This pamphlet provides general authority, Congress enacted the “Bank- information only. While every effort ruptcy Code” in 1978. The Code, has been made to ensure that the infor- which is codified as title 11 of the mation contained in it is accurate as of United States Code, has been amended the date of publication, it is not a full several times since its enactment. It is and authoritative statement of the law the uniform federal law that governs all on any particular topic. The informa- bankruptcy cases. tion presented in the pamphlet should The procedural aspects of the bank- not be cited or relied upon as legal ruptcy process are governed by the authority and should not be used as a Federal Rules of Bankruptcy Procedure substitute for reference to the United (often called the “Bankruptcy Rules”) States Bankruptcy Code (title 11, and local rules of bankruptcy. The United States Code) and the Federal Bankruptcy Rules contain a set of official Rules of Bankruptcy Procedure. forms for use in bankruptcy cases. The Most importantly, the pamphlet Bankruptcy Code and Bankruptcy Rules should not substitute for the advice of (and local rules) set forth the formal legal INTRODUCTION• 1 procedures for dealing with the debt process is carried out by a trustee who problems of individuals and businesses. is appointed to oversee the case. There is a bankruptcy court for each A debtor’s involvement with the judicial district in the country. Each bankruptcy judge is usually very limited. state has one or more districts. There A typical chapter 7 debtor will not are 90 bankruptcy districts across the appear in court and will not see the country. The bankruptcy courts gener- bankruptcy judge unless an objection is ally have their own clerk’s offices. raised in the case. A chapter 13 debtor may only have to appear before the bankruptcy judge at a plan confirmation hearing. Usually, the only formal pro- The court official ceeding at which a debtor must appear is the meeting of creditors, which is usual- with decision-making ly held at the offices of the United States trustee. This meeting is informally called power over federal a “341 meeting” because section 341 of the Bankruptcy Code requires that the bankruptcy cases debtor attend this meeting so that credi- tors can question the debtor about debts is the United States and property. A fundamental goal of the federal bankruptcy judge, bankruptcy laws enacted by Congress is to give debtors a financial “fresh a judicial officer of start” from burdensome debts. The Supreme Court made this point about the United States the purpose of the bankruptcy law in a 1934 decision: district court. [I]t gives to the honest but unfortunate debtor…a new op- portunity in life and a clear field The court official with decision-mak- for future effort, unhampered by ing power over federal bankruptcy the pressure and discouragement cases is the United States bankruptcy of preexisting debt. judge, a judicial officer of the United States district court. The bankruptcy Local Loan v. Hunt, 292 U.S. 234, 244 judge may decide any matter connected (1934). This goal is accomplished with a bankruptcy case, such as eligi- through the bankruptcy discharge, bility to file or whether a debtor should which releases debtors from personal receive a discharge of debts. Much of liability from specific debts and pro- the bankruptcy process is administra- hibits creditors from ever taking any tive, however, and is conducted away action against the debtor to collect from the courthouse. In cases under those debts. This pamphlet describes chapter 7, 12, or 13, and sometimes in the Discharge in Bankruptcyin a ques- chapter 11 cases, this administrative tion and answer format, discussing the 2• INTRODUCTION timing of the discharge, the scope of the a house. It is also favored because it discharge (what debts are discharged allows the debtor to propose a “plan” and what debts are not discharged), to repay creditors over time—usually objections to discharge, and revocation three to five years. At a confirmation of the discharge. It also describes what hearing, the court either approves or a debtor can do if a creditor attempts to disapproves the plan, depending on collect a discharged debt after the whether the plan meets the Bankruptcy bankruptcy case is concluded. Code’s requirements for confirmation. There are five basic types of bank- Chapter 13 is very different from chap- ruptcy cases provided for under the ter 7, since the chapter 13 debtor usu- Bankruptcy Code, each of which is dis- ally remains in possession of the prop- cussed in this pamphlet. The cases are erty of the estate and makes payments traditionally given the names of the to creditors, through the trustee, based chapters that describe them. on the debtor’s anticipated income over Chapter 7, entitled Liquidation, con- the life of the plan. Unlike chapter 7, templates an orderly, court-supervised the debtor does not receive an immedi- procedure by which a trustee collects ate discharge of debts. The debtor must the assets of the debtor’s estate, reduces complete the payments required under them to cash, and makes distributions the plan before the discharge is to creditors, subject to the debtor’s received. The debtor is protected from right to retain certain exempt property lawsuits, garnishments, and other cred- and the rights of secured creditors. itor action while the plan is in effect. Because there is usually little or no The discharge is also considerably nonexempt property in most chapter 7 broader (i.e., more debts are eliminat- cases, there may not be an actual liqui- ed) under chapter 13 than the discharge dation of the debtor’s assets. These under chapter 7. cases are called “no-asset cases.” A Chapter 11, entitled Reorganization, creditor holding an unsecured claim ordinarily is used by commercial enter- will get a distribution from the bank- prises that desire to continue operating ruptcy estate only if the case is an asset a business and repay creditors concur- case and the creditor files a proof of rently through a court-approved plan of claim with the bankruptcy court. In reorganization. The chapter 11 debtor most chapter 7 cases, the debtor has the exclusive right to file a plan of receives a discharge that releases the reorganization for the first 120 days debtor from personal liability for cer- after the order for relief and must pro- tain dischargeable debts. The debtor vide creditors with a disclosure state- normally receives a discharge just a few ment containing information adequate months after the petition is filed. to enable creditors to evaluate the plan. Chapter 13, entitled Adjustment of The court ultimately approves (con- Debts of an Individual With Regular firms) or disapproves the plan of re- Income, is designed for an individual organization. Under the confirmed debtor who has a regular source of plan, the debtor can reduce its debts by income. Chapter 13 is often preferable repaying a portion of its obligations and to chapter 7 because it enables the discharging others. The debtor can also debtor to keep a valuable asset, such as terminate burdensome contracts and INTRODUCTION• 3 leases, recover assets, and rescale its Since being established by Congress in operations in order to return to prof- 1970, the Securities Investor Protection itability. Under chapter 11, the debtor Corporation has protected investors normally goes through a period of con- who deposit stocks and bonds with bro- solidation and emerges with a reduced kerage firms by ensuring that every cus- debt load and a reorganized business.