The Basics: the Bankruptcy Code

If you start looking into bankruptcy, you hear about different “Chapters” and “code sections.” They are all part of the Bankruptcy Code.

 

Putting the Constitutional Power into Practice

The Constitution gave Congress the power “to establish… uniform laws on the subject of bankruptcies throughout the United States.”  (Article 1, Section 8, Clause 4.)  But Congress then had to write those laws.

That has been easier said than done in our history. For most of the 19th century there was NO federal bankruptcy law in effect at all. There was because there was so much disagreement about some of the most basic principles—like whether there should be a discharge of debts, and whether debtors should be able to protect some of their property with exemptions. There was gridlock between politicians representing bankers in places like New York, Boston, and Philadelphia, and those representing small farmers and merchants throughout most of the South and West.

So Congress could only manage to pass a federal bankruptcy law during some of the economically disastrous “panics” that the nation experienced. So bankruptcy laws were passed three times in the 1800s, but each time after a few years the fragile political coalition that had come together during the crisis fell apart and the law was repealed. Finally, in 1898 the first “permanent” bankruptcy law was passed, and we’ve had one since then. The most recent totally new bankruptcy law, the Bankruptcy Code, was enacted in 1978. It’s been amended many times in the 35 years since then, in a major way most recently in 2005.

The Bankruptcy Code

Federal law is organized in the United States Code, abbreviated “U.S.C.”   It is about 200,000 pages long. The U.S.C. consists of 51 “titles,” which are like volumes of a very large book. Each title addresses a logically coherent area of law.

Most of bankruptcy law is contained in Title 11, Bankruptcy. You hear this referred to as the Bankruptcy Code. Title 11 is divided into nine chapters, three of which lay out the laws about bankruptcy in general, while six provide specific bankruptcy options. A bankruptcy case is referred to by the chapter under which it is filed, as in a “Chapter 7” case.

The laws within each Chapter are listed in “sections.” The sections are numbered starting with the first one or two numerals of the chapter within which they are found. So, for example, the required tasks of the Chapter 13 trustee are covered in Section 1302, found within Chapter 13.

The Most Important Parts of the Bankruptcy Code

The Chapters that provide the main bankruptcy options for consumers and small business owners are:

  • Chapter 7: “Liquidation,” the most common consumer alternative, “straight bankruptcy”
  • Chapter 11: “Reorganization,” primarily used with businesses
  • Chapter 12: “Adjustment of Debts of a Family Farmer,” similar to Chapter 13, but for farmers, ranchers, fishermen
  • Chapter 13: “Adjustment of Debts of an Individual,” the 3-to-5 year partial payment plan

Among the most important sections for consumers are the following:

  • Section 341: The “meeting of creditors”—debtors have to attend one, although in most cases no creditors attend
  • Section 362: Automatic stay—stops creditor collections once a bankruptcy is filed
  • Section 522: Exemptions—assets protected in bankruptcy (need to look at your separate state exemptions, too, most likely)
  • Section 523: Exceptions to discharge—types of debts that will not or may not be discharged in a bankruptcy case
  • Section 524: Effect of discharge—the legal write-off of a debt, including sanctions for creditors who violate the discharge
  • Section 727: Discharge—the rare circumstances when no discharge of debts is entered in a Chapter 7 case
  • Section 1322: Contents of plan—what a Chapter 13 plan must do, and may do
  • Section 1325: Confirmation of plan—requirements to get court approval of your plan
  • Section 1328: Discharge—the Chapter 13 discharge, its requirements and exceptions

The Bankruptcy Code Is Not Leisure Reading

Unfortunately, as you will see if you try to read the above sections, much of the Bankruptcy Code is very difficult to understand. Presumably Congress didn’t purposely make it so complicated, although at some points you may wonder. Some of the language seems to contradict itself. Vague terms are left undefined—the “undue hardship” that it takes to discharge a student loan, for example. Other terms are misleading—a “fraudulent transfer” often does not need to be fraudulent, for example. The Code is clearly a product of decades, in some respects even centuries, of political and economic compromises. The only way to understand and use it to your benefit is to have in your corner an attorney who has not only studied it top to bottom, but now spends every day helping people like you gain those benefits. 

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