Chapter I Introduction: What Is Bankruptcy?

JurisdictionUnited 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 pre-bankruptcy claims. Still smaller in number but much larger in total dollars are those cases where debtors seek to reorganize under chapter 11, which can be used by individuals, but is used far more often by companies. All this went forward under the Bankruptcy Code — in effect, with various amendments, since 1978.

Congress altered the pattern — or sought to — with the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPC-PA). The clear purpose was to make chapter 7 bankruptcy protection less accessible to individuals, compelling more debtors to pay their debts, perhaps via chapter 13.

More than 10 years have passed since the enactment of BAPCPA. While it has not had an enormous impact on the number of chapter 7 filings (most individuals remain eligible for relief under chapter 7), filing under that chapter is now more difficult and expensive. BAPCPA has also spawned a large amount of litigation because of the ambiguities in the statute, and the U.S. Supreme Court has ruled on several of these ambiguities.

Aside from the more general and better-known procedures, the Bankruptcy Code harbors other specialized chapters that deserve at least passing...

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