bankruptcy 101

Bankruptcy law is federal law.  This is so because Article I of the Constitution authorizes Congress to pass uniform bankruptcy laws – and it has done so. If you go to a bankruptcy court hearing, it will be held in a federal court.  The present set of bankruptcy laws is known as the Bankruptcy Code and was enacted by Congress in 1978, and has been amended several times.  While bankruptcy law is federal law, it does incorporate aspects of state law into it.  For example in Kentucky, Debtors are permitted to use the federal exemptions or the Kentucky exemptions; however in Indiana, Debtors must use the Indiana exemptions.  Additionally, the bankruptcy courts in Kentucky may interpret some aspects of the Bankruptcy Code different than the bankruptcy courts in other states such as Indiana.

Bankruptcy law has two components, one to provide discharge relief to the debtor, and the other to provide a framework (to the extent permitted by Congress) for the payment of creditor claims.

Most consumer cases are filed under Chapter 7 or Chapter 13 of the Bankruptcy Code.  It is possible, but rare, for a consumer bankruptcy to be filed under Chapter 11 of the Bankruptcy Code.  Most small business bankruptcies are filed under Chapter 7, Chapter 11 and Chapter 13 of the Bankruptcy Code. 

Chapter 7 is a straight bankruptcy.  With certain exceptions, the debtor will receive a discharge of his or her debts and will receive a fresh start on their financial affairs.  A trustee is appointed to liquidate the “non-exempt” assets of the debtor; however in most cases there are no “non-exempt” assets.  A debtor whose debts are primarily consumer debts must qualify for Chapter 7 under the “Means Test.”  Chapter 7 is treated in more depth on a separate Webpage (see Bankruptcy Topical Guide Pages sidebar). 

Chapter 13 is a reorganization proceeding wherein the debtor pays his monthly projected “disposable income” to the Chapter 13 trustee for a period of three to five years.  Chapter 13 is generally used in such instances where 1) the debtor does not qualify for Chapter 7 because of the means test, 2) the debtor has non-exempt property which he intends to keep, 3) the debtor needs time to cure arrearages on a mortgage and save his home from foreclosure, and 4) the debtor has non-dischargeable debt and needs time to pay that debt.   Chapter 13 is available only to individuals, not corporations or other entities.  Chapter 13 is treated in more depth on a separate Webpage (see Bankruptcy Topical Guide Pages sidebar).

Chapter 11 is also a reorganization proceeding which is available to corporations and other entities as well as to persons.  Chapter11s are time intensive and, compared to Chapter 7 and Chapter 13, much more expensive.  Chapter 11 will normally be used instead of Chapter 13 if a) the debtor is an entity rather than an individual, or 2) the debts owed by the debtor exceed the amounts allowable in a Chapter 13.  Chapter 11 is treated in more depth on a separate Webpage (see Bankruptcy Topical Guide Pages sidebar).

There are other forms of bankruptcy, i.e. Chapter 9 for Municipalities, Chapter 12 for Family Farmers and Chapter 15 for Cross-Border Cases, which are not covered in this Website.

Bankruptcy cases are monitored by the Office of the Unite States Trustee.  The Office of the United States Trustee is a part of the Department of Justice.