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US Bankruptcy Code

Updated on May 22, 2024
Article byPrakhar Gajendrakar
Edited byAaron Crowe
Reviewed byDheeraj Vaidya, CFA, FRM

What Is US Bankruptcy Code?

The US Bankruptcy Code defines the federal laws and procedures every US citizen or business is obligated to adhere to while filing for bankruptcy. All bankruptcies are filed and handled by the US federal courts. Chapters in the bankruptcy code define the different types of bankruptcies.

US Bankruptcy Code

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Under the US Bankruptcy Code, the initial process of filing for bankruptcy begins with a debtor filing a petition in the bankruptcy court. A debtor can be an individual, a couple, a company, or any other entity. The US Constitution allows the US Congress to enact laws on the subject of bankruptcy. It is also referred to as Title 11 of the United States Code.

Key Takeaways

  • The US bankruptcy code refers to the rules and regulations one must follow while filing for bankruptcy in the US.
  • Any US entity can file for bankruptcy following the US bankruptcy code; this includes individuals, spouses, and companies.
  • There have been many reforms to these laws: the Bankruptcy Reform Act of 1978 is the last passed legislation that guides and enforces the present bankruptcy procedures.
  • Due to certain favorable provisions of the code, many people choose to file for bankruptcy in the US compared to other nations.

US Bankruptcy Code Explained

US Bankruptcy Code is the set of rules, laws, and regulations that guides the process and legal proceedings of bankruptcy filing. When any individual, business, or organization incurs exceedingly high amounts of debt and is unable to pay them off, they can file for bankruptcy through US bankruptcy courts. The court assesses their financial condition based on the filing.

The court may discharge the debt and give the individual or entity a chance to make a fresh start. However, it is not the only scenario. Depending on the circumstances, the court can make different decisions. It may allow the debtor a fresh start, free them from a substantial part of their debt, seize their assets, or let them keep their possessions.

The purpose of the US Bankruptcy Code is to ensure that all the processes, legal proceedings, and actions are per the jurisdiction and the code is followed properly. The rules followed in bankruptcy courts are called the Federal Rules of Bankruptcy Procedures. The code has different chapters, each defining the various reliefs and exemptions available to debtors. It also states the rights of a debtor.

If an individual is filing for bankruptcy, they can do it under Chapter 7 or Chapter 13, depending on their eligibility. Similarly, districts, cities, towns, and other municipal regions and villages file under Chapter 9. Businesses can file for bankruptcy again under Chapter 7 or separately under Chapter 11. The debt relief for fishermen and family farmers is listed under Chapter 12. Lastly, bankruptcy involving cross-border issues is filed under Chapter 15 of the Bankruptcy Code.

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History

The history of the US Bankruptcy Code follows a broad timeline. In 1787, the US Constitution under Article I, Section 8 authorized Congress to introduce proper bankruptcy laws for the nation. The Bankruptcy Act of 1800 was the first federal bankruptcy law, which stated that district court judges could appoint nonjudicial commissioners to monitor and administer the proceedings. In 1839, the federal law abolished the practice of debt imprisonment (a prison for people who could not repay the debt they owed others).

Then came the Bankruptcy Act of 1841, with provisions for accommodating all cases (voluntary and involuntary) and discharging debtors willing to submit their assets, and offering recovery of fraudulent transfers. This Act offered much-needed relief to debtors. Later, a new law titled the Bankruptcy Act of 1867 was introduced through which Congress gave district courts the power to become bankruptcy courts. It was followed by the Bankruptcy Act of 1898, which introduced referees in the proceedings. It lasted for six decades.

After this came the Bankruptcy Reform Act of 1978, with individual bankruptcy judges appointed by the US president and approved by the Senate for a 14-year service term. A new iteration was introduced later called the Bankruptcy Reform Act of 1994. It established the National Bankruptcy Commission to investigate changes in bankruptcy law and allowed courts to hold jury trials. At last, came the Bankruptcy Abuse Prevention and Consumer Protection Act 2005, substantially amending the 1978 Act with new provisions.

Examples

Below are two real-world examples of the US bankruptcy code.

Example #1

In a recent ruling, the US Supreme Court declared that a woman cannot use the US Bankruptcy Code to protect herself and avoid paying debt for fraud committed by her partner/spouse. The debtor, Kate Bartenwerfer, owed a real estate developer $200,000 for a house (which was in disrepair) sold by her partner without full disclosure. The Supreme Court said that she owed the debt even if she did not know about her husband’s misrepresentation of the house they sold in San Francisco, California to a real estate developer. The developer sued the couple and won.

Justice Amy Coney Barrett’s decision addressed the difference of opinion between federal appeal courts about whether an innocent party can seek protection in law for fraud committed by another person after filing for bankruptcy.

Example #2

Athenex, a biopharmaceutical company headquartered in Buffalo, New York, and its multiple subsidiaries filed for voluntary bankruptcy under the US Bankruptcy Code Chapter 11. The filing proceedings took place in the Southern District of Texas Court. Athenex planned to sell its assets. It also communicated its intention to reduce shareholder value. The court allowed the company to expedite its sale.

Based on the court’s approval, the company reached a mutual agreement with its secured lenders to use cash collateral. By doing so, financial obligations were met. However, the company declared it had sufficient funds to support manufacturing at Athenex Pharma Solutions to fulfill customer orders before shutdown.

Benefits

The benefits of the US bankruptcy code are:

  • The purpose of the US bankruptcy code is to offer guidance and function as a manual and protocol initiator on how an individual or entity can file for bankruptcy in the US.
  • The code offers many benefits to individuals looking for a fresh start post-bankruptcy filing.
  • Although the state law varies, the code benefits debtors in certain ways. For instance, at times, their assets are exempted from sale or submission despite the bankruptcy filing.
  • Most people like to file for bankruptcy in the US solely because of the flexibility offered by the US Bankruptcy Code.
  • When someone files for bankruptcy, the collection agencies are instructed to stop pursuing them automatically through a stay order.
  • It works in the debtor’s favor, and certain chapters of the code offer reliefs and exemptions even after the bankruptcy filing. For example, eligible debtors under the US Bankruptcy Code Chapter 7 may be discharged from repaying unsecured debts.
  • If an individual files for bankruptcy, it prohibits their employers from firing them from their jobs.

Frequently Asked Questions (FAQs)

1. What are the disadvantages of the US Bankruptcy Code?

The disadvantages of the US Bankruptcy Code include:
 
– The bankruptcy remains on a person/entity’s credit record for up to a decade, negatively impacting future loans and finances.
– It is complex and troublesome to undergo bankruptcy filing proceedings.
– If the court does not rule in favor of the debtor, the US Bankruptcy Code may leave an individual/entity with insurmountable debt.

2. What is the US Bankruptcy Code Chapter 11?

Chapter 11 of the US Bankruptcy Code focuses on reorganization. Debtors may seek relief per the provisions of this chapter. A debtor retains their assets, performs required duties, and exhibits the powers of a trustee. Certain other reliefs are allowed by the court. However, it depends on the circumstances and the assets and documents a debtor is willing to submit. It also considers their history of loan repayments.

3. What is the US Bankruptcy Code Chapter 15?

The US Bankruptcy Code Chapter 15 deals with cross-border insolvency and defines the cooperation and legal relationship between US and foreign courts about cross-border insolvency cases. When a bankruptcy case is proceeding in foreign countries, the debtor may have a cross-border asset. Therefore, Chapter 15 focuses on judgment enforcement and jurisdiction rules.

This has been a guide to What Is US Bankruptcy Code. Here, we explain it in detail with its history, examples, and benefits. You can learn more about it from the following articles –

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