Back to Basics

Back to Basics: What Is Bankruptcy?

This is the inaugural post in a new series called “Back to Basics” in which we’re going to examine both bankruptcy and consumer law from the point of view of the consumer who is looking for a basic understanding of these subjects. Today’s post: What Is Bankruptcy?

Origins of Bankruptcy Law

Bankruptcy law is federal law; it’s codified (or collected) in Title 11 of the United States Code. However, many issues of state law also affect the conduct of a bankruptcy case.

This complexity is one of the reasons that it’s not advisable to try to conduct a bankruptcy case without the benefit of an attorney.

What Is Bankruptcy?

Simply put, bankruptcy is a label that we apply to any case filed under Title 11 of the US Code, in which the debtor (the person filing the case, usually) seeks to have his or her debts discharged.

This can happen under any one of several chapters. Future posts will explore these chapters in greater detail, but here’s a brief rundown:

• Chapter 7 is a liquidation model of bankruptcy, in which nonexempt property belonging to the debtor can be taken by the trustee and sold in order to pay unsecured and secured creditors.
• Chapter 11 is a reorganization model, in which the debtor proposes a payment plan to repay his or her creditors, in whole or in part (usually in part, sometimes for pennies on the dollar, but dependent on the debtor’s financial situation).
  In Chapter 11, the debtor is typically a business, although some individuals with a great deal of debt that exceeds the limits placed on Chapter 13 cases, can also file under this chapter.
• Chapter 12 is a special chapter just for family fishermen and farmers. It’s a relatively new addition to bankruptcy law, and is a reorganization model just like Chapters 11 and 13.
• Chapter 13 is a reorganization plan for individual debtors. Like Chapter 11 and 12, it’s for debtors with regular income, and provides for repayment plans ranging from 3 to 5 years, depending on certain criteria.

Where Did Bankruptcy Originate?

Some form of bankruptcy has existed in Western culture since Roman Empire days. However, our modern system of bankruptcy has its roots in English statutory law from the 16th century on.

In the United States, the framers of our US Constitution sought to unify a patchwork of debtor/creditor statutes that had resulted in a crazy quilt that made little sense. So, in Article I, Section 8 of the Constitution, Congress was granted the authority to create “uniform Laws on the subject of bankruptcies throughout the United States.”

However, just because you can do something, doesn’t mean you will do it, right?

Congress made three attempts to create a bankruptcy scheme for the new nation; each time, within 1 to 3 years, the attempts were repealed.

Finally, in the late 19th century, one last attempt “stuck” and the Bankruptcy Act of 1898 was passed. It remained on the books for 80 years with certain changes and modifications over the years.

Modern bankruptcy has its roots in the first major revisions to the bankruptcy scheme — 1978’s Bankruptcy Reform Act. The ‘78 Act provided Chapters 11 and 13 (although versions of these chapters existed previously), and empowered bankruptcy judges. Jurisdiction became a major stumbling point, however; a resolution was attempted with a group of 1984 amendments.

The credit lobby was pretty livid by this time at what they perceived as a pro-debtor law. They began working on Congress almost immediately, and their efforts finally resulted in the laughably titled “Bankruptcy Abuse Prevention and Consumer Protection Act of 2005″ — a law that deserves its own post, so we’ll stop there for this post and pick up with the 2005 law in the next post.

© 2008 SC Bankruptcy & Consumer Law Blog.