Bankruptcy in the United States

Bankruptcy in the United States
Name	Bankruptcy in the United States
Caption	Title 11 of the United States Code governs bankruptcy.
Enacted by	United States Congress
Date enacted	1978 (Bankruptcy Reform Act)
Administered by	U.S. Courts, United States Trustee Program

Bankruptcy in the United States is a legal proceeding conducted under federal law to provide relief for individuals and entities unable to repay their outstanding debts. The primary source of law is Title 11 of the United States Code, enacted through the Bankruptcy Reform Act of 1978 and significantly amended by subsequent legislation like the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005. The system is administered by specialized bankruptcy courts within the federal judiciary, overseen by the United States Trustee Program, and aims to balance debtor relief with fair treatment of creditors.

Overview of U.S. Bankruptcy Law

The constitutional basis for bankruptcy law is found in Article I, Section 8 of the United States Constitution, which grants Congress the power to establish "uniform Laws on the subject of Bankruptcies throughout the United States." This federal authority preempts most state insolvency laws, creating a uniform national framework. The core statutes are codified in Title 11 of the United States Code, which is divided into chapters, each providing a distinct legal process. Key administering entities include the Judicial Conference of the United States and the Executive Office for United States Trustees. Landmark Supreme Court cases, such as those involving Northern Pipeline Construction Co. v. Marathon Pipe Line Co. and Stern v. Marshall, have shaped the jurisdictional boundaries of bankruptcy courts.

Types of Bankruptcy (Chapters)

The most common bankruptcy proceedings are filed under specific chapters of Title 11. Chapter 7, known as liquidation, involves the appointment of a trustee in bankruptcy who collects and sells the debtor's non-exempt assets to pay creditors, as seen in cases like Lehman Brothers and Enron. Chapter 11, or reorganization, is primarily used by businesses like General Motors and American Airlines to restructure debts and continue operations. Chapter 13 provides a repayment plan for individuals with regular income, allowing them to keep assets while paying creditors over three to five years. Less common types include Chapter 12 for family farmers and fishermen and Chapter 9 for municipalities, infamously utilized by Detroit and Stockton, California.

The Bankruptcy Process

A bankruptcy case begins with the filing of a petition in the appropriate United States bankruptcy court, which triggers an automatic stay halting most collection actions against the debtor. The debtor must submit detailed schedules of assets, liabilities, and a statement of financial affairs. In a Chapter 7 case, the United States Trustee appoints a trustee to administer the estate, who may liquidate assets and investigate the debtor's conduct. In Chapter 11, the debtor typically remains as a "debtor in possession" to manage the business and propose a plan of reorganization, which must be voted on by creditor committees and confirmed by the court, a process central to the restructuring of Pacific Gas and Electric Company.

Bankruptcy Courts and Administration

Bankruptcy cases are adjudicated in bankruptcy courts, which are units of the federal district courts. Bankruptcy judges are appointed by the Courts of Appeals for 14-year terms. The United States Trustee Program, a component of the United States Department of Justice, oversees the administration of cases, appoints private trustees, and monitors compliance. Major districts with high-volume caseloads include the District of Delaware and the Southern District of New York, which handle many large corporate reorganizations. The system's administration is guided by the Federal Rules of Bankruptcy Procedure.

Effects and Consequences of Bankruptcy

A successful bankruptcy discharge releases the debtor from personal liability for certain debts, but it is noted on credit reports maintained by agencies like Equifax and Experian for up to ten years. Certain obligations, such as recent tax debts, student loans, and alimony, are generally non-dischargeable. For corporations, a Chapter 11 discharge allows the entity to emerge from bankruptcy, often with new ownership structures, as occurred with Delta Air Lines. For individuals, filing affects the ability to obtain future credit and may impact security clearances. Violations of bankruptcy law, such as fraud, can lead to the denial of a discharge or criminal prosecution.

Historical Development and Reform

Early U.S. bankruptcy law was temporary and episodic, with the first statutes passed in 1800 following the Panic of 1797. The permanent system began with the Bankruptcy Act of 1898, which established modern concepts of voluntary bankruptcy. The Chandler Act of 1938 added reorganization provisions. The comprehensive modern code was created by the Bankruptcy Reform Act of 1978, which established the current court and trustee system. Major reform came with the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, which imposed means testing for Chapter 7 and added new requirements for consumer debtors. Historical financial crises, including the Panic of 1837, the Great Depression, and the Financial crisis of 2007–2008, have driven legislative changes and spikes in filings.

Category:Bankruptcy in the United States Category:United States federal law