Bankruptcy Overview

Bankruptcy law provides for the development of a plan that allows a debtor, who is unable to pay his creditors, to resolve his debts through the division of his assets among his creditors. This supervised division also allows the interests of all creditors to be treated with some measure of equality. Certain bankruptcy proceedings allow a debtor to stay in business using revenue that continues to be generated to resolve his debts. An additional purpose of bankruptcy law is to allow certain debtors to free themselves (to be discharged) of the financial obligations they have accumulated, after their assets are distributed, even if their debts have not been paid in full.

Bankruptcy law is federal statutory law contained in Title 11 of the United States Code. Congress passed the Bankruptcy Code under its Constitutional grant of authority to “establish. . . uniform laws on the subject of Bankruptcy throughout the United States.” See U.S. Constitution Article I, Section 8. States may not regulate bankruptcy though they may pass laws that govern other aspects of the debtor-creditor relationship. A number of sections of Title 11 incorporate the debtor-creditor law of the individual states.

Bankruptcy proceedings are supervised by and litigated in the United States Bankruptcy Courts. These courts are a part of the District Courts of The United States. The United States Trustees were established by Congress to handle many of the supervisory and administrative duties of bankruptcy proceedings. Proceedings in bankruptcy courts are governed by the Bankruptcy Rules which were promulgated by the Supreme Court under the authority of Congress.

There are two basic types of Bankruptcy proceedings. A filing under Chapter 7 is called liquidation. It is the most common type of bankruptcy proceeding. Liquidation involves the appointment of a trustee who collects the non-exempt property of the debtor, sells it and distributes the proceeds to the creditors. Under Chapters 11, 12, and 13 a bankruptcy proceeding involves the rehabilitation of the debtor to allow him to use his future earnings to pay off his creditors. Under Chapter 7, 12, 13, and some 11 proceedings a trustee is appointed to supervise the assets of the debtor. A bankruptcy proceeding can either be entered into voluntarily by a debtor or initiated by his creditors. After a bankruptcy proceeding is filed, for the most part, creditors may not seek to collect their debts outside of the proceeding. The debtor is not allowed to transfer property that has been declared part of the estate subject to the proceedings. Furthermore, certain pre-proceeding transfers of property, secured interests, and liens may be delayed or invalidated. Various provisions of the Bankruptcy Code also establish the priority of creditors’ interests.

BANKRUPTCY FACT:

THE TYPICAL FAMILY FILING FOR BANKRUPTCY IN 1997 OWED MORE THAN ONE AND A HALF TIMES ITS ANNUAL INCOME IN SHORT-TERM, HIGH-INTEREST DEBT. A FAMILY EARNING $24,000 HAD AN AVERAGE OF $36,000 IN CREDIT CARD AND SIMILAR DEBT.

FEDERAL RESERVE (1997)

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