Bankruptcy

Bankruptcy law is the federal system for establishing the rights and responsibilities of insolvent debtors and their creditors. Title 11 of the United States Code-enacted by Congress in 1978-governs all United States bankruptcy cases. Congress passed the Bankruptcy Code pursuant to authority granted by Article I, Section 8 of the United States Constitution.

Bankruptcy law, and Title 11 specifically, comprise six types of bankruptcy proceedings, each with its own chapter and each initiated in a federal bankruptcy court. Each bankruptcy action provides for a discharge through which the debtor is ultimately relieved of personal liability for certain debts. Chapter 7 establishes a liquidation process for insolvent debtors with insufficient income to meet their obligations to their creditors. Under Chapter 7 bankruptcy law, a trustee assumes control of the debtor's assets, allows the debtor to retain certain exempt property, liquidates the remaining assets, and distributes the resulting cash to the creditors. The Code sets forth specific priority rules for the distribution of the debtor's estate. Chapter 11 allows a bankrupt entity to remain in business and pay its creditors pursuant to a court-approved reorganization plan. To confirm a plan, a court must find that (1) the plan is feasible, (2) the plan is proposed in good faith, and (3) the plan complies with the Code. Chapter 13 makes it possible for individual debtors with regular sources of income to pay off their debts over time through court-approved plans. Remaining debts are discharged at the conclusion of plan periods. Chapter 9 bankruptcy law creates a reorganization system for municipalities, and Chapter 12 sets forth rules for bankruptcies involving family farmers or fishermen. Finally, Chapter 15 bankruptcy law governs cross-border cases involving property subject to the laws of the United States and at least one other country.