Bankruptcy

"Neither a borrower nor a lender be."  William Shakespeare

Bankruptcy is a remedial system provided for by federal law which is designed to fulfill the two functions of providing relief to the debtor by resolving and settling their current debts while at the same time protecting the rights and interests of their creditors.  It is important to remember that bankruptcy law is not a source of legal obligations and creates no rights in one party against another.  There are two main types of bankruptcy, liquidation and reorganization.  Congress was given the power in the U.S. Constitution to enact bankruptcy law.  The bankruptcy code enacted by Congress is Title 11 of the United States Code.  The bankruptcy code is organized into Chapters dealing with differnt types of bankruptcy proceedings briefly described as follows:

      Chapter 7 governs liquidation cases both for individuals and for businesses. In these cases, a trustee is appointed whose duty it is to learn about the debtor's financial affairs from information contained in the schedules that the debtor must file with the court.  Using the knowledge of the debtor's financial affairs the trustee is charged with the responsibility of collecting the debtor's non-exempt assets, reducing them to cash, and distributing the proceeds to creditors according to distribution rules contained in the bankruptcy code.

       Chapter 13 governs reorganization cases for individual debtors who have a steady source of income and debts which are within limits defined in the bankruptyc code.  Under Chapter 13 the debtor proposes a plan, not to exceed five years in length, which specifies how much each of their creditors will be paid from the debtor's post-petition income.  The creditors need not get paid in full but they must get at least as much as they would have received if the debtor had filed for a liquidation under Chapter 7.  Debtors under Chapter 13 can elect to keep their property as the creditors are paid out of the debtor's post-petition income after necessary living expenses.

          Chapter 11 governs the reorganization cases involving businesses but can be used for individuals particularly for those individuals who's debts exceed the limits for a Chapter 13 case.  A Chapter 11 case provides for a repayment plan that like a Chapter pays the creditors at least as much as they would have received in a Chapter 7 liquidation unless the creditor agrees to accept less.  Unlike a Chapter 13 plan, a Chapter 11 plan does not limit its duration to a specified number of years.  

             There are other less frequently used chapters of the bankruptcy code such as a Chapter 12 reorganization plan for farmers and fishermen; Chapter 9 bankruptcies for municipalities; and Chapter 15 for transnational bankruptcies.