The Bankruptcy Code, which is codified as title 11 of the United States Code, was enacted by Congress in 1978 and has been amended several times since its enactment. It governs all bankruptcy cases.
The procedural aspects are governed by the Federal Rules of Bankruptcy Procedure (often called the "Bankruptcy Rules") and in addition, there are local rules enacted for each district bankruptcy court. The Bankruptcy Rules contain a set of official forms for use in bankruptcy cases and set forth the formal legal procedures for dealing with the debt problems of individuals and businesses.
There is a bankruptcy court for each judicial district in the country and each state has one or more districts. Each bankruptcy court generally has its’ own clerk's offices.
The Bankruptcy Judge, who is an appointed Federal Judge, is conferred with decision-making power over federal bankruptcy cases The bankruptcy judge may decide any matter connected with a bankruptcy case. Much of the bankruptcy process is administrative in nature and is conducted away from the courthouse by a trustee who is appointed to oversee the case.
A debtor's involvement with the bankruptcy judge is usually very minimal. A typical chapter 7 debtor will not appear in court unless an objection is raised. A chapter 13 debtor may only have to appear before in Court at a plan confirmation hearing. Typically, the only formal proceeding at which a debtor must appear is the meeting of creditors, held at the U.S. Trustee’s office. This meeting is called a "341 meeting" because section 341 of the Bankruptcy Code requires debtors to attend this meeting so that creditors can question the debtor about debts and property.
A fundamental goal of the bankruptcy laws is to give debtors financial relief and a "fresh start" from burdensome debts. 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.
The three most common types of bankruptcy cases provided for under the Bankruptcy Code, are traditionally given the names of the chapters that describe them.
Chapter 7 - This Chapter is entitled Liquidation and 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 the debtor's right to retain certain exempt property and the rights of secured creditors. Because most property in chapter 7 cases are exempt, there may not be an actual liquidation of the debtor's assets. These cases are called "no-asset cases." A creditor holding an unsecured claim will not get a distribution in a no-asset case. They will only get a distribution from the estate if it is an asset case and the creditor files a proof of claim with the bankruptcy court. 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. The debtor normally receives a discharge within a few months after the petition is filed. Amendments to the Bankruptcy Code enacted in to the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 require the application of a "means test" to determine whether individual consumer debtors qualify for relief under chapter 7. If the debtor's income is in excess of certain thresholds, the debtor may not be eligible for chapter 7 relief.
Chapter 11 - This Chapter is entitled Reorganization and ordinarily is used by commercial enterprises that wish to continue operating a business and repay creditors concurrently through a court-approved plan of reorganization. The debtor usually has the exclusive right to file a plan of reorganization for the first 120 days after it files the petition and must provide creditors with a disclosure statement with information adequate to enable creditors to evaluate the plan. The court ultimately approves (confirms) or disapproves the plan of reorganization. If it is confirmed, the debtor can reduce its debts by repaying a portion 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. The debtor usually goes through a period of consolidation and emerges with reduced debt and a reorganized business.
Chapter 13 - This Chapter is entitled Adjustment of Debts of an Individual With Regular Income and is designed for an individual debtor who has a regular source of income. Chapter 13 is often preferable to chapter 7 because it enables the debtor to keep valuable assets, such as a house, and because it allows the debtor to propose a "plan" to repay creditors over time – usually three to five years. This is also used by consumer debtors who do not qualify for chapter 7 under the means test. At a confirmation hearing, the court either approves or disapproves the debtor's repayment plan, depending on whether it meets the requirements for confirmation. The chapter 13 debtor usually remains in possession of the property of the estate and makes payments to creditors, through the Trustee, based upon the debtor's anticipated income over the life of the plan. Since the debtor is required to make monthly payments, the debtor does not receive an immediate discharge of debts. Instead, the debtor must complete the payments required under the plan before the discharge is received. In the meantime, the debtor is protected from lawsuits, garnishments, and other creditor actions while the plan is in effect. Finally, the discharge is also broader, meaning more debts are eliminated) under chapter 13.
This article is not legal advice and is not intended as legal advice. This article is intended to provide only general, non-specific legal information. This article is not intended to cover all the issues related to the topic discussed. The specific facts that apply to your matter may make the outcome different than would be anticipated by you. You should consult with an attorney familiar with the issues and the laws of your jurisdiction. This article does not create any attorney-client relationship.