Credit, Debt & Bankruptcy Guide

Bankruptcy in the United States is a matter placed under Federal jurisdiction by the United States Constitution (in Article 1, Section 8), which allows Congress to enact "uniform laws on the subject of Bankruptcy throughout the United States." Its implementation, however, is found in statute law. The relevant statutes are incorporated within the Bankruptcy Code, located at Title 11 of the United States Code, and amplified by state law in the many places where Federal law either fails to speak or expressly defers to state law.

While bankruptcy cases are always filed in United States Bankruptcy Court (an adjunct to the U.S. District Courts), bankruptcy cases, particularly with respect to the validity of claims and exemptions, are often highly dependent upon State law. State law therefore plays a major role in many bankruptcy cases, and it is often not possible to generalize bankruptcy law across state lines.

U.S. Bankruptcy Code

There are six types of bankruptcy under the Bankruptcy Code, located at Title 11 of the United States Code:

• Chapter 7 - basic liquidation for individuals and businesses
• Chapter 9 - municipal bankruptcy 
• Chapter 11 - rehabilitation or reorganization, used primarily by business debtors, but sometimes by individuals with substantial debts and assets
• Chapter 12 - rehabilitation for family farmers and fishermen
• Chapter 13 - rehabilitation with a payment plan for individuals with a regular source of income
• Chapter 15 - ancillary and other international cases

Chapter 7

The most common types of personal bankruptcy for individuals are Chapter 7 and Chapter 13. In Chapter 7, a debtor surrenders his or her non-exempt property to a bankruptcy trustee who then liquidates the property and distributes the proceeds to the debtor's unsecured creditors. In exchange, the debtor is entitled to a discharge of debt, except that the debtor will not be granted a discharge if he or she is guilty of certain types of inappropriate behavior (e.g. concealing records relating to financial condition) and except that some debts (e.g. spousal support, some taxes) will not be discharged even though the debtor is generally discharged from his or her debt. Many individuals in financial distress own only exempt property (e.g. clothes, household goods, an older car) and will not have to surrender any property to the trustee. The amount of property that a debtor may exempt varies from state to state. Chapter 7 relief is available only once in any eight year period. Generally, the rights of secured creditors to their collateral continues even though their debt is discharged (e.g. absent some arrangement by a debtor to surrender a car or "reaffirm" a debt, the creditor with a security interest in the debtor's car may repossess the car even if the debt to the creditor is discharged).

Chapter 11

Chapter 11 is a chapter of the United States Bankruptcy Code, which permits reorganization under the bankruptcy laws of the United States. Chapter 11 bankruptcy is available to any business, whether organized as a corporation or sole proprietorship, or individual with unsecured debts of at least $336,900.00 or secured debts of at least $1,010,650.00, although it is most prominently used by corporate entities. In contrast, Chapter 7 governs the process of a liquidation bankruptcy, while Chapter 13 provides a reorganization process for the majority of private individuals with unsecured debts of less than $336,900.00 and secured debts of less than $1,010,650.00 as of April 1, 2007.

Chapter 13

In Chapter 13, the debtor retains ownership and possession of all of his or her assets, but must devote some portion of his or her future income to repaying creditors, generally over a period of three to five years. The amount of payment and the period of the repayment plan depend upon a variety of factors, including the value of the debtor's property and the amount of a debtor's income and expenses. Secured creditors may be entitled to greater payment than unsecured creditors.

Bankruptcy Abuse Prevention & Consumer Protection Act

The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, Pub. L. No. 109-8, 119 Stat. 23 (April 20, 2005) ("BAPCPA"), substantially amended the Bankruptcy Code. Many provisions of BAPCPA were forcefully advocated by consumer lenders and were just as forcefully opposed by many consumer advocates, bankruptcy academics, bankruptcy judges, and bankruptcy lawyers. Its enactment followed nearly eight years of debate in Congress. Most of its provisions became effective on October 17, 2005. Upon signing the bill, President Bush stated, "Under the new law, Americans who have the ability to pay will be required to pay back at least a portion of their debts. Those who fall behind their state's median income will not be required to pay back their debts. The new law will also make it more difficult for serial filers to abuse the most generous bankruptcy protections. Debtors seeking to erase all debts will now have to wait eight years from their last bankruptcy before they can file again. The law will also allow us to clamp down on bankruptcy mills that make their money by advising abusers on how to game the system." Among its many changes to consumer bankruptcy law, BAPCPA enacted a "means test," which has made it more difficult for a small number of financially distressed individual debtors whose debts are primarily consumer debts to qualify for relief under Chapter 7 of the Bankruptcy Code. If a debtor does not qualify for relief under Chapter 7 of the Bankruptcy Code, the debtor may still seek relief under Chapter 13 of the Code. BAPCPA also requires individuals seeking bankruptcy relief to undertake credit counseling with approved counseling agencies prior to filing a bankruptcy petition and to undertake education in personal financial management from approved agencies prior to being granted a discharge of debts under either Chapter 7 or Chapter 13. Some studies of the operation of the credit counseling requirement suggest that it provides little benefit to debtors who receive the counseling because the only realistic option for many is to seek relief under the Bankruptcy Code.

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