The Bankruptcy Code of the United States

What is the Bankruptcy Code in the United States?

Title 11 of the United States Code is often known as the US Bankruptcy Code. It specifies companies and individuals’ steps when filing for bankruptcy in the US Bankruptcy Court.

The US Constitution grants the US Congress the power to make legislation concerning the country’s bankruptcy. Legislators have used this power to enact numerous bankruptcy laws, the most recent being the Bankruptcy Reform Act of 1978, which essentially controls the country’s current bankruptcy rules.

The Bankruptcy Code of the United States has a long and illustrious history

In the year 1800, the United States passed its first bankruptcy legislation. The Act of 1841 replaced this legislation, which was abolished in 1803. The Act of 1867, which was modified in 1874 and subsequently abolished in 1878, replaced the Act of 1841, which was repealed in 1843. The Nelson Act of 1898 was the country’s first modern bankruptcy law.

The Bankruptcy Reform of 1978 was the second contemporary bankruptcy legislation to be established. The most recent modification to the 1978 legislation is the Bankruptcy Abuse Prevention and Consumer Protection Act (2005).

The contents of the United States Bankruptcy Code (Title 11)

Businesses and individuals seeking relief under the US Bankruptcy Code may file a petition under Chapters 7, 9, 11, 12, 13, and 15 of the US Bankruptcy Code.

Liquidation (Chapter 7)

Chapter 7 of the Bankruptcy Code governs the liquidation process and is the most frequent bankruptcy in the United States. It entails the bankruptcy court appoints a trustee to recover the debtor’s non-exempt assets. 

The trustee’s job is to liquidate the assets and distribute the profits to creditors in the order of their priority. In the United States, businesses and individuals may apply for Chapter 7 bankruptcy.

In the case of companies, a struggling firm may file for bankruptcy or be compelled by creditors. Unless the court-appointed trustee chooses to continue operations after the petition is filed, the company will cease to exist. 

In the event of a big corporation, the trustee may choose to sell an entire division to another corporation to generate money to pay creditors. Because the business assets serve as security for the loan extended to the liquidation company, secured creditors are typically paid first.

Individuals who own property, own a company, or live in the United States may apply for Chapter 7 liquidation in a federal court. These people may be permitted to retain specific exempt properties, although the value of exempt assets varies by state. The trustee sells other assets to pay creditors.

While the court has the authority to dismiss some unsecured obligations, other types of debts are not. Tax arrears over the previous three years, child support, property taxes, school loans, and penalties issued by a court of law are examples of these obligations.

With the passage of the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) in 2005, the bankruptcy law was amended. The amendment was enacted to make it more difficult for consumers to file for bankruptcy in general. 

The amendment’s supporters argued that it would shield some creditors against losses caused by bankrupt clients, like credit card firms.

Reorganization of Municipalities (Chapter 9)

Chapter 9 of the Bankruptcy Code is dedicated only to municipalities and how to assist them in debt restructuring. In this instance, a municipality refers to a state’s political unit or governmental entity. 

According to the US Bankruptcy Code, a municipality must be permitted to be a debtor in a Chapter 9 bankruptcy by state legislation, a government official, or an entity authorized by state law to grant such authorizations. 

Only 12 states expressly permit bankruptcy, while another 12 allow municipalities to file for Chapter 9 bankruptcy provided they meet specific criteria.

Before creating Chapter 9, the only option for distressed municipalities was for creditors to file a mandamus lawsuit to compel the municipality to increase taxes. In 1934, the Bankruptcy Act was amended to include municipalities in the bankruptcy code (the law was declared unconstitutional by a US court in 1935, but the US Congress passed a similar law in 1937).

The 2008 financial crisis resulted in many municipal bankruptcies, including six in 2010, thirteen in 2011, and twelve in 2012. On July 18, 2013, Detroit, Michigan, became the most extensive municipality to declare bankruptcy. Jefferson County (Alabama) and Stockton (California) are two more significant municipalities that filed for Chapter 9 bankruptcy.

Reorganization (Chapters 11, 12, and 13)

Unlike Chapter 7, which is concerned with liquidating the debtor’s assets, Chapters 11, 12, and 13 are concerned with restructuring the debtor’s assets. The bankruptcy court will often enable the debtor to retain part of their assets and utilize them to repay creditors.

Businesses, whether single proprietorships, partnerships, or corporations, may file for Chapter 11 bankruptcy. Individuals may apply for Chapter 11 as too, although businesses most often use it. As a debtor in possession, the debtor retains control of the company while supervised by the bankruptcy court.

Only family farmers and fishers are eligible for Chapter 12 of the Bankruptcy Code. It offers extra advantages, such as more significant debt limits that Chapters 11 and 13 do not. 

The Family Farmer Bankruptcy Act of 1986, which was enacted in reaction to the restriction of agricultural financing, introduced Chapter 12 to the bankruptcy law in 1986.

Individuals who do not wish to file for Chapter 7 bankruptcy may use Chapter 13 to reorganize their finances. Individuals are given a chance to restructure their finances while the bankruptcy court protects them. Chapter 13 plans usually last three to four years, but they can’t go more than five.

Cross-Border Insolvency (Chapter 15)

In cross-border insolvency proceedings, Chapter 15 of the bankruptcy law collaborates between US courts, foreign courts, and other agencies. A company or person may link to assets in more than one nation during specific bankruptcy procedures in other countries. 

The selection of law rules, jurisdiction rules, and judgment enforcement rules is essential for cross-border bankruptcy.

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