Chapter I Introduction: What Is Bankruptcy?

• Jurisdiction: United States

I. Introduction: What Is Bankruptcy?

Bankruptcy is a system under which persons (including individuals and business entities) can deal with their financial distress. One important point to remember about bankruptcy is that it is a process, and the framework and procedure for that process is found in federal law in the Bankruptcy Code, 11 U.S.C. § 101 et seq. (the "Code"). A key feature of this process is that it is designed to be a collective process; in other words, bankruptcy enables a financially struggling person or entity to adjust its payment obligations to all of its creditors at one time and in one court. At the end of the bankruptcy case, the debtor is (ideally) discharged from its pre-bankruptcy debts. In other words, the debtor pays some portion of those debts through the bankruptcy proceeding, and afterward, no one can collect the unpaid portion of those pre-bankrupt-cy debts.

Some individuals can wipe out past debts by surrendering their property for distribution among their creditors under chapter 7 of the Bankruptcy Code. Businesses can also file for chapter 7, but such a filing means the end of the business.

A smaller number of individuals file under chapter 13, where they enjoy the protection of the court while they use some or all of their post-bankruptcy earnings to pay...