By:
Kavya, Associate Attorney
Introduction
The United States Constitution gives Congress the authority to enact laws regarding bankruptcy for the citizens and businesses in the country. In exercising this authority, legislators have passed several laws about bankruptcy, the most recent being the Bankruptcy Reform Act of 1978, which largely governs the country’s current bankruptcy laws.
History of the US Bankruptcy Code
The U.S. Bankruptcy Code or Title 11 governs the procedures that businesses and individuals must follow when filing for bankruptcy in Bankruptcy Court.
Although many iterations of bankruptcy law were passed and repealed, the Nelson Act of 1898 became the first modern bankruptcy legislation in the country, followed by the Bankruptcy Reform of 1978. The most recent amendment to the bankruptcy act was written in 2005 and is known as The Bankruptcy Abuse Prevention and Consumer Protection Act.. The amendment was intended to limit consumer debtors from abusing the bankruptcy system. . Supporters of the amendment claimed that the change would protect certain creditors, such as credit card companies, from losses resulting from bankrupt customers.
Contents of the US Bankruptcy Code (Title 11)
Businesses and individuals seeking relief under the US Bankruptcy Code are allowed to file a petition under the Bankruptcy Code chapters 7, 9, 11, 12, 13, and 15.
Chapter 7- Liquidation: Chapter 7 of the Bankruptcy Code is the most common form of bankruptcy in the United States, and it covers the liquidation process. Chapter 7 bankruptcy involves the appointment of a trustee by the bankruptcy court to collect the non-exempt assets of the debtor. The trustee is tasked with selling the assets and distributing the proceeds to creditors in order of preference. Businesses and individuals in the United States can file for bankruptcy under Chapter 7.
In the case of businesses, a troubled company may file, or be forced by creditors to file, for bankruptcy. After the petition is filed, the business ceases to exist unless the court-appointed trustee decides to continue operations. In the case of a large company, the trustee may decide to sell an entire division to another company to raise funds to pay the creditors. Secured creditors are usually paid first because the company’s assets serve as collateral for the credit advanced to the liquidating company.
Individuals who own property, run a business, or reside in the United States may file for liquidation in a federal court under Chapter 7. These individuals may be allowed to keep certain exempt properties, but the value of properties that may be classified as exempt varies from one state to another. Other assets are sold by the trustee to repay creditors.
While the court may discharge certain unsecured debts, other forms of debts are exempted from the discharge. These debts may include tax arrears for the last three years, child support, property taxes, student loans, and fines imposed by a court of law.
Chapter 9 – Reorganization of Municipalities: Chapter 9 of the Bankruptcy Code deals exclusively with municipalities and how to help restructure their debts. A municipality, in this case, refers to a political subdivision or a public agency of a state. The U.S. Bankruptcy Code requires that, for a municipality to be a debtor in a Chapter 9 bankruptcy, it must be authorized to be a debtor by state law, a government officer, or an organization allowed by state law to give such authorizations. Only 12 states specifically authorize bankruptcy, while 12 others approve Chapter 9 bankruptcy after the municipalities have met certain stringent rules.
Chapters 11, 12, and 13 – Reorganization: Chapters 11, 12, and 13 deal with the reorganization of the debtor’s assets. Usually, the bankruptcy court will allow the debtor to keep some or all their assets and use them to pay debts owed to creditors.
Chapter 11 bankruptcy is available to businesses and individuals, however it is favored by corporate entities. All businesses, including sole proprietorships, partnerships, or corporations are eligible to file for Chapter 11. In this case, the debtor remains in charge of the business but under the oversight of the bankruptcy court.
Chapter 12 of the Bankruptcy Code is only applicable to family farmers and fishermen. It provides additional benefits, such as higher debt ceilings, that are not provided by Chapters 11 and 13. Chapter 12 was added to the bankruptcy code as a response to the tightening of agricultural credit, and remains limited to this specific industry.
Chapter 13 provides reorganization plans to individuals who do not want to go through a Chapter 7 bankruptcy. Under Chapter 13, individuals get an opportunity to reorganize their financial affairs while under the protection of the bankruptcy court. Chapter 13 plans are typically for three to four years, and may not exceed five years.
Chapter 15 – Cross-Border Insolvency
Chapter 15 of the bankruptcy code allows for the cooperation between United States courts, foreign courts, and other authorities involved in cross-border insolvency cases. During certain bankruptcy proceedings in foreign countries, a business or individual may have a connection to assets located in more than one country. Cross-border insolvency focuses on the choice of law rules, jurisdiction rules, and the enforcement of judgment rules.
Conclusion
