Article I, Section 8, of the US Constitution authorizes Congress to enact “uniform Laws on the subject of Bankruptcies.” Under this grant of authority, Congress created the “Bankruptcy Code” in 1978. The US Bankruptcy Code, which is codified in title 11 of the US Code, has been amended several times since its enactment. Because the Constitution grants this authority to the federal government, the Bankruptcy Code is a uniform federal law governing all bankruptcy cases in Oregon, Colorado and elsewhere – including the US territories.
Bankruptcy is governed by the Federal Rules of Bankruptcy Procedure (or the “Bankruptcy Rules”) and the local rules of each bankruptcy court. The Bankruptcy Rules contain a set of official forms for use in bankruptcy cases. There is a bankruptcy court for each judicial district in the country. For information on where Oregon’s bankruptcy court is located, check out this previous post: Where Is Oregon’s Bankruptcy Court? For directions to Colorado’s bankruptcy court, click here: Where Is Colorado’s Bankruptcy Court?
The person with decision-making power over federal bankruptcy cases is the US bankruptcy judge, who a judicial officer of the United States District Court. The bankruptcy judge may decide any matter connected with a bankruptcy case, such as your eligibility to file or whether to grant your discharge of debts. Much of the bankruptcy process is administrative, however, and is conducted away from the courthouse. In cases under chapters 7, 12 or 13, and sometimes in chapter 11 cases, this administrative process is carried out by a trustee, who is appointed by the court to oversee the case. For a list of trustees in Colorado, click this link: Who Are the Bankruptcy Trustees in Colorado? And for Oregon, click here: Who Are the Bankruptcy Trustees in Oregon?
A debtor’s involvement with the bankruptcy judge is usually very limited. A typical chapter 7 debtor will not appear in court and will not see the bankruptcy judge unless an objection is raised in the case. A chapter 13 debtor may only have to appear before the bankruptcy judge at a plan confirmation hearing. Usually, the only formal proceeding at which a debtor must appear is the meeting of creditors, which is usually held at the offices of the US trustee. This meeting is informally called a “341 meeting” because section 341 of the Bankruptcy Code requires that the debtor attend this meeting so that creditors can question the debtor about debts and property.
The fundamental purpose of bankruptcy is to give debtors a financial fresh start from overwhelming and burdensome debts. In fact, the US Supreme Court made this point in a 1934 decision: “[Bankruptcy] gives to the honest but unfortunate debtor . . . a new opportunity in life and a clear field for future effort, unhampered by the pressure and discouragement of preexisting debt.” Local Loan Co. v. Hunt, 292 U.S. 234 (1934).
A bankruptcy debtor’s fresh start is accomplished through his or her bankruptcy discharge, which releases debtors from personal liability from specific debts and prohibits creditors from ever taking any action against the debtor to collect those debts. Six basic types of bankruptcy cases are allowed under the Bankruptcy Code, each of which is described below. The cases are traditionally given the names of the chapters that describe them.
Chapter 7, entitled Liquidation, outlines an orderly, court-supervised procedure by which a trustee takes over the assets of the debtor’s estate, reduces them to cash and makes distributions to creditors, subject to the debtor’s right to retain certain exempt property and the rights of secured creditors. Because there is usually little or no nonexempt property in chapter 7 cases, there may not be an actual liquidation of the debtor’s assets. These cases are called “no-asset cases.” A creditor holding an unsecured claim will get a distribution from the bankruptcy estate only if the case is an asset case and the creditor files a proof of claim with the bankruptcy court. In most chapter 7 cases, if the debtor is an individual, he or she receives a discharge that releases him or her from personal liability for certain dischargeable debts. The debtor normally receives a discharge just a few months after the petition is filed. Amendments to the Bankruptcy Code enacted in to the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 require the application of a “means test” to determine whether individual consumer debtors qualify for relief under chapter 7. If such a debtor’s income is in excess of certain thresholds, the debtor may not be eligible to file chapter 7 bankruptcy.
Chapter 9, entitled Adjustment of Debts of a Municipality, provides for reorganization, much like a reorganization under chapter 11, of a municipality – which includes cities and towns, as well as villages, counties, taxing districts, municipal utilities and school districts.
Chapter 11, entitled Reorganization, is used by companies to continue operating as a business while repaying creditors concurrently through a court-approved reorganization plan. Under a court-approved chapter 11 reorganization plan, the company can reduce its debts by repaying a portion of its obligations and discharging others. The debtor can also terminate burdensome contracts and leases, recover assets and rescale its operations in order to return to profitability. Under chapter 11, the debtor normally goes through a period of consolidation and emerges with a reduced debt load and a reorganized business structure.
Chapter 12, entitled Adjustment of Debts of a Family Farmer or Fisherman with Regular Annual Income, provides bankruptcy protection to family farmers and fishermen. The chapter 12 process is very similar to that of chapter 13, under which the debtor proposes a plan to repay debts over a period of time – no more than 3-5 years. There is also a trustee in every chapter 12 case whose duties are very similar to those of a chapter 13 trustee. The chapter 12 trustee’s disbursement of payments to creditors under a confirmed plan parallels the procedure under chapter 13. Chapter 12 allows a family farmer or fisherman to continue to operate his or her normal business while the plan is being carried out.
Chapter 13, entitled Adjustment of Debts of an Individual With Regular Income, is designed for an individual debtor who has a regular source of income. Chapter 13 is often preferable to chapter 7 because it enables the debtor to keep a valuable asset, such as a house and allows the debtor to propose a plan to repay creditors over time – usually 3-5 years. Chapter 13 is also used by consumer debtors who do not qualify for chapter 7 relief under the means test. At a confirmation hearing, the court either approves or disapproves the debtor’s repayment plan, depending on whether it meets the Bankruptcy Code’s requirements for confirmation. Chapter 13 is very different from chapter 7 since the chapter 13 debtor usually remains in possession of the property of the estate and makes payments to creditors, through the trustee, based on the debtor’s anticipated income over the life of the plan. Unlike chapter 7, the debtor does not receive an immediate discharge of debts, however. Instead, the debtor must complete his or her payments under the plan before the discharge is granted. The debtor is protected from lawsuits, garnishments and other creditor actions while the plan is in effect. The discharge is also somewhat broader (i.e., more debts are eliminated) under chapter 13 than the discharge under chapter 7.
The purpose of Chapter 15, entitled Ancillary and Other Cross-Border Cases, is to provide an effective mechanism for dealing with cases of cross-border insolvency and bankruptcy. This publication discusses the applicability of Chapter 15 where a debtor or its property is subject to the laws of the United States and one or more foreign countries.
For more information about bankruptcy, contact our offices. Our experienced team can help you get a debt free fresh start.