Chapter II The Bankruptcy System

• Jurisdiction: United States

II. The Bankruptcy System

A. Bankruptcy as a Framework

Bankruptcy is a system of federal law, enacted by Congress pursuant to a constitutional authorization. In an important sense, however, bankruptcy is only a framework for modifying rights established by other law. Often that other law is state law, but it does not have to be state law; it could be other nonbankruptcy federal law, or it could be foreign law.

For example, bankruptcy deals with property of the debtor, but what is property of the debtor? You really cannot answer that question from federal law alone; you have to look to state (nonbank-ruptcy) law. In the same vein, bankruptcy pays claims against the debtor, but the question of what counts as a claim is largely a matter of nonbankruptcy law.

Among these and many other fields of relevant nonbankruptcy law, a couple demand special attention. Specifically, a creditor outside of bankruptcy may have a security interest, such as a mortgage, giving it first priority in some property of the debtor in the event the debtor does not pay his debt. Security interests that are valid under non-bankruptcy law will be respected in bankruptcy. This rule means that good bankruptcy lawyers are also proficient in their respective state laws of security interests.

For a different sort of example, lots of debtors go into bankruptcy owing taxes due under federal law. The federal government as a tax collector may be a creditor of the estate. The tax collector gets some special advantages in bankruptcy law, and he also gets to carry over some special rights that he enjoys outside of bankruptcy law.

B. The Bankruptcy Court

In addition to creating a...