In this recession, the word bankruptcy has been common place both in the individual and commercial arenas. Individual and commercial bankruptcies have reached an all-time high and the protections afforded by the federal bankruptcy code have come under scrutiny as being too debtor friendly and too damaging to creditors. It is not uncommon for a commercial bankruptcy to have a trickle down effect on other individuals and businesses which are dependent or critically involved with the debtor-business that filed for bankruptcy protection.
Article 1, Section 8 of the United States Constitution gives Congress the right to adopt and enact “uniform laws on the subject of Bankruptcy.” The current version of the bankruptcy code has undergone several modifications since our founders initially gave birth to the power. The bankruptcy code is currently codified in Title 11 of the United States Code. The procedural aspects of the bankruptcy process are governed by the Federal Rules of Bankruptcy Procedure.
Q: WHERE IS A BANKRUPTCY ACTION INITIATED?
A: There is a bankruptcy court for each federal district in the United States. In other words, any where there is a federal district court, there will also be a federal bankruptcy court in that jurisdiction. Each state has at least one district and many states have multiple districts. Currently there are approximately 90 bankruptcy courts.
Q: WHAT IS THE FUNDAMENTAL GOAL AND/OR PURPOSE OF THE BANKRUPTCY PROTECTIONS?
A: To give debtors a financial “fresh start” from burdensome debts. This goal was cited in a 1934 Supreme Court case: “it gives to the honest but unfortunate debtor a new opportunity in life and a clear file for future effort, unhampered by the pressure and discouragement of preexisting debt.”
Q: HOW IS THIS BANKRUPTCY GOAL ACCOMPLISHED?
A: The basic goal of a bankruptcy proceeding is accomplished through a “discharge.” A discharge releases debtors from personal liability from specific debts and prohibits creditors from ever taking any action against the debtor to collect those debts.
Q: ARE ALL TYPES OF DEBTS DISCHARGEABLE IN BANKRUPTCY?
A: Absolutely not. Certain types of debt are non-dischargeable in a bankruptcy proceeding, including, debts owed to state, local and the federal government and debts incurred with the intent to hinder, delay or defraud a credit. A debtor must truly come to the table with clean hands in order to avail himself to the protections afforded by a bankruptcy proceeding.
Q: HOW MUCH INVOLVEMENT DOES A DEBTOR HAVE WITH A BANKRUPTCY JUDGE DURING A TYPICAL BANKRUPTCY PROCEEDING?
A: Not very much involvement at all. In fact, if there is nothing out of the ordinary and none of the creditors object to a particular discharge for a procedural or substantive reason, a debtor may never see a judge or the inside of a court room. Most types of bankruptcies can be facilitated through the filing of paper work.
Q: WHAT IS THE ROLE OF THE BANKRUPTCY TRUSTEE IN A PROCEEDING?
A: A bankruptcy trustee is an officer of the court, appointed to collect, preserve and liquidate assets for the benefit of creditors. A trustee has broad powers to high professionals to manage, market and sell assets which may be subject in a bankruptcy estate.
Q: WHAT ARE THE GENERAL TYPES OF BANKRUPTCIES CASES WHICH MAY BE FILED UNDER THE BANKRUPTCY CODE?
A: There are six (6) basic types of bankruptcies which may be filed:
- Chapter 7: This type of bankruptcy is commonly known as a liquidation. A Chapter 7 may be filed by an individual or business debtor. This type of bankruptcy contemplates the orderly, court-supervised procedure by-which a trustee takes control over the assets of the debtor’s estate, reduces them to cash, and makes distributions to creditors in accordance with the bankruptcy code.
- Chapter 9: This type of bankruptcy is commonly known as an adjustment of debts of a municipality. It provides, basically for reorganization of debt similar to a Chapter 11 bankruptcy in a private context. Only a municipality may file under this Chapter.
- Chapter 11: This type of bankruptcy is commonly known as a reorganization. It is normally used by commercial enterprises that desire to continue to operate a business and repay creditors over a period of time through a court ordered repayment plan. It is in contrast to a Chapter 7, where the business liquidates its assets, distributes its proceeds and ceases operations. This type of bankruptcy is highly complex, costly and time consuming. Often times, a bankruptcy starts as a Chapter 11 and then ultimately is converted to a Chapter 7 liquidation.
- Chapter 12: This type of bankruptcy is commonly known as an adjustment of debt of a family farmer or fisherman with regular income. It provides relief to family farmers and fisherman with regular income. The process under this Chapter is very similar to a Chapter 13, but it is reserved specifically for farmer and fisherman debtors.
- Chapter 13: This type of bankruptcy is commonly known as an adjustment of debts of an individual with regular income. Protection under it is generally preferred over a Chapter 7 because it allows debtors to maintain certain valuable assets, such as a house. It also requires that a court-approved plan be submitted and approved by the court which provides for the repayment of creditors over a period of time (typically 3-5 years).
- Chapter 15: This type of bankruptcy is commonly known as ancillary and cross-border cases. The protections afforded under this chapter are reserved exclusively for those debtors which are properly subject to the laws of the United States and one or more foreign countries.
Attorney’s note: As laws vary substantially from state to state and are constantly changing, only a lawyer can provide you with specific advice to rely upon. This article is being provided to the members of the MIA and readers of the Cutting Edge for general informational purposes only and does not constitute legal advice. The information provided within this article is not a substitute for an attorney’s advice. If a member or reader has a specific issue dealing with the subject matter of this article it is highly recommended that he/she consult with a licensed attorney in their jurisdiction.