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Summary of the United States Bankruptcy Code
The United States Constitution (Article 1, Section 8, Clause 4), authorizes Congress to enact "uniform Laws on the subject of Bankruptcies throughout the United States." Congress has exercised this authority several times since 1801, most recently by adopting the Bankruptcy Reform Act of 1978, codified in Title 11 of the United States Code, commonly referred to as the Bankruptcy Code. The Bankruptcy Code has been amended several times since 1978, most recently in extensive amendments in 2005 through the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 or BAPCPA. Some law relevant to bankruptcy is found in other parts of the United States Code. For example, bankruptcy crimes are found in Title 18 of the United States Code (Crimes), tax implications of bankruptcy are found in Title 26 of the United States Code (Internal Revenue Code), and the creation and jurisdiction of bankruptcy courts are found in Title 28 of the United States Code (Judiciary and Judicial procedure).
While bankruptcy cases are always filed in United States bankruptcy court (which are units of the United States district courts) and federal law procedurally governs bankruptcy cases, state laws are often applied when determining property rights. For example, law governing the validity of liens or rules protecting certain property from creditors (known as exemptions), derive from state law. State law therefore plays a major role in many bankruptcy cases and it is often unwise to generalize some bankruptcy issues across state lines.
Chapters of the Bankruptcy Code
There are several types of proceedings that fit under the general category of bankruptcy. Title 11 has multiple chapters, some of which provide different procedures available for debt resolution.
Chapter 7: Liquidation
Liquidation under a Chapter 7 filing is the most common form of bankruptcy. 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. Because each state allows for debtors to keep essential property, most Chapter 7 cases are "no asset" cases, meaning the debtor keeps all his or her property.
Chapter 9: Reorganization for Municipalities
A Chapter 9 bankruptcy is available only to municipalities. Chapter 9 is a form of reorganization, not liquidation. A famous example of a municipal bankruptcy was in Orange County, California.
Chapters 11, 12, and 13: Reorganization
Bankruptcy under Chapter 11, Chapter 12, or Chapter 13 is more complex reorganization and involves allowing the debtor to keep some or all of his or her property and to use future earnings to pay off creditors. Consumers usually file chapter 7 or chapter 13. Chapter 11 filings by individuals are allowed, but are rare.
Chapter 12: Reorganization for Family Farmers / Fishers
Chapter 12 is similar to Chapter 13 but is available only to "family farmers" and "family fisherman" in certain situations. As recently as mid-2004 Chapter 12 was scheduled to expire, but in late 2004 it was renewed and made permanent.
Chapter 15: Cross-Border Insolvency
The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 added Chapter 15 (as a replacement for section 304) and deals with cross-border insolvency: foreign companies with U.S. debts.
Features of U.S. Bankruptcy Law
Commencement of a bankruptcy case creates an "estate." The estate consists of all property interests of the debtor at the time of case commencement, subject to certain exclusions and exemptions. In the case of a married person in a community property state, the estate may include certain community property interests of the debtor's spouse even if the spouse has not filed bankruptcy. The estate may also include other items, including but not limited to property acquired by will or inheritance within 180 days after case commencement.
For federal income tax purposes, the bankruptcy estate of an individual in a Chapter 7 or 11 case is a separate taxable entity from the debtor. The bankruptcy estate of a corporation, partnership, or other collective entity, or the estate of an individual in Chapters 12 or 13, is not a separate taxable entity from the debtor.
In Northern Pipeline Co. v. Marathon Pipe Line Co., the United States Supreme Court held that certain provisions of the law relating to Article I bankruptcy judges (who are not life-tenured "Article III" judges) are unconstitutional. Congress responded in 1984 with changes to remedy constitutional defects. Under the revised law, bankruptcy judges in each judicial district constitute a "unit" of the applicable United States District Court. The judge is appointed for a term of fourteen years by the United States Court of Appeals for the circuit in which the applicable district is located.
Formally the United States District Courts have subject-matter jurisdiction over bankruptcy matters. However, each such district court may, by order, "refer" bankruptcy matters to the Bankruptcy Court. As a practical matter, most district courts have a standing "reference" order to that effect, so that all bankruptcy cases in that district are handled, at least initially, by the Bankruptcy Court. In unusual circumstances, a district court may in a particular case "withdraw the reference" (i.e., take the case or a particular proceeding within the case away from the Bankruptcy Court) and decide the matter itself.
Decisions of the bankruptcy court are generally appealable to the District Court, and then to the Court of Appeals. However, in a few jurisdictions a separate court called a bankruptcy appellate panel (composed of bankruptcy judges) hears certain appeals from bankruptcy courts.