Bankruptcy in the United States
Encyclopedia
Bankruptcy in the United States is governed under the United States Constitution
(Article 1, Section 8, Clause 4) which authorizes Congress to enact "uniform Laws on the subject of Bankruptcies throughout the United States." Congress has exercised this authority several times since 1801, most recently by adopting the Bankruptcy Reform Act of 1978, codified in Title 11 of the United States Code
, and commonly referred to as the Bankruptcy Code
("Code"). The Code has been amended several times since, with the most signficant recent changes enacted in 2005 through the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA). Some law relevant to bankruptcy is found in other parts of the United States Code. For example, bankruptcy crimes are found in Title 18 of the United States Code (Crimes). Tax implications of bankruptcy are found in Title 26 of the United States Code (Internal Revenue Code
), and the creation and jurisdiction of bankruptcy courts are found in Title 28 of the United States Code
(Judiciary and Judicial procedure).
While bankruptcy cases are filed in United States Bankruptcy Court
(units of the United States District Court
s), and federal law governs procedure in bankruptcy cases, state laws are often applied when determining property rights. For example, law governing the validity of liens or rules protecting certain property from creditors (known as exemptions), may derive from state law or federal law. Because state law plays a major role in many bankruptcy cases, it is often unwise to generalize some bankruptcy issues across state lines.
The first modern Bankruptcy Act in America, sometimes called the "Nelson Act", was initially entered into force in 1898. The current Bankruptcy Code was enacted in 1978 by § 101 of the Bankruptcy Reform Act of 1978, and generally became effective on October 1, 1979. The current Code completely replaced the former Bankruptcy Act, the "Chandler Act" of 1938. The Chandler Act gave unprecedented authority to the Securities and Exchange Commission in the administration of bankruptcy filings. The current Code has been amended numerous times since 1978. See also the Bankruptcy Abuse Prevention and Consumer Protection Act
of 2005.
filing is the most common form of bankruptcy. Liquidation involves the appointment of a trustee who collects the non-exempt property of the debtor, sells it and distributes the proceeds to the creditors. Because each state allows for debtors to keep essential property, most Chapter 7 cases are "no asset" cases, meaning that there are not sufficient non-exempt assets to fund a distribution to creditors.
U.S. Bankruptcy law changed dramatically in 2005 with the passage of BAPCPA, which made it more difficult for consumer debtors to file bankruptcy in general and Chapter 7 in particular.
Advocates of BAPCPA claimed that its passage would reduce losses to creditors such as credit card companies, and that those creditors would then pass on the savings to other borrowers in the form of lower interest rates. Critic Michael Somkovic asserts that these claims turned out to be false. He charges that although credit card company losses decreased after passage of the Act, prices charged to customers increased, and credit card company profits soared.
bankruptcy is available only to municipalities
. Chapter 9 is a form of reorganization, not liquidation. A famous example of a municipal bankruptcy was in Orange County, California
.
, Chapter 12
, or Chapter 13
is more complex reorganization and involves allowing the debtor to keep some or all of his or her property and to use future earnings to pay off creditors. Consumers usually file chapter 7 or chapter 13. Chapter 11 filings by individuals are allowed, but are rare. Chapter 12 is similar to Chapter 13 but is available only to "family farmers" and "family fisherman" in certain situations. Chapter 12 generally has more generous terms for debtors than a comparable Chapter 13 case would have available. As recently as mid-2004 Chapter 12 was scheduled to expire, but in late 2004 it was renewed and made permanent.
(as a replacement for section 304) and deals with cross-border insolvency: foreign companies with U.S. debts.
." It is against this estate to which the debtor's creditors must look. The estate consists of all property interests of the debtor at the time of case commencement, subject to certain exclusions and exemptions. In the case of a married person in a community property
state, the estate may include certain community property interests of the debtor's spouse even if the spouse has not filed bankruptcy. The estate may also include other items, including but not limited to property acquired by will or inheritance within 180 days after case commencement.
For federal income tax
purposes, the bankruptcy estate of an individual in a Chapter 7 or 11 case is a separate taxable entity from the debtor. The bankruptcy estate of a corporation, partnership, or other collective entity, or the estate of an individual in Chapters 12 or 13, is not a separate taxable entity from the debtor.
, the United States Supreme Court held that certain provisions of the law relating to Article I bankruptcy judges (who are not life-tenured "Article III" judges) are unconstitutional. Congress responded in 1984 with changes to remedy constitutional defects. Under the revised law, bankruptcy judges in each judicial district constitute a "unit" of the applicable United States District Court
. The judge is appointed for a term of 14 years by the United States Court of Appeals
for the circuit in which the applicable district is located.
The United States District Courts have subject-matter jurisdiction
over bankruptcy matters. However, each such district court may, by order, "refer" bankruptcy matters to the Bankruptcy Court, and most district courts have a standing "reference" order to that effect, so that all bankruptcy cases are handled by the Bankruptcy Court. In unusual circumstances, a district court may "withdraw the reference" (i.e., taking a particular case or proceeding within the case away from the bankruptcy court) and decide the matter itself.
Decisions of the bankruptcy court are generally appealable to the district court, and then to the Court of Appeals. However, in a few jurisdictions a separate court called a Bankruptcy Appellate Panel
(composed of bankruptcy judges) hears certain appeals from bankruptcy courts.
appoints a separate United States Trustee
for each of twenty-one geographical regions for a five year term. Each Trustee is removable from office by and works under the general supervision of the Attorney General. The U.S. Trustees maintain regional offices that correspond with federal judicial districts and are administratively overseen by the Executive Office for United States Trustees in Washington, D.C. Each United States Trustee, an officer of the U.S. Department of Justice, is responsible for maintaining and supervising a panel of private trustees for chapter 7 bankruptcy cases. The Trustee has other duties including the administration of most bankruptcy cases and trustees. Under section 307 of title 11, a U.S. Trustee "may raise and may appear and be heard on any issue in any case or proceeding" in bankruptcy except for filing a plan of reorganization in a chapter 11 case.
at the moment a bankruptcy petition is filed. The automatic stay generally prohibits the commencement, enforcement or appeal of actions and judgments, judicial or administrative, against a debtor for the collection of a claim that arose prior to the filing of the bankruptcy petition. The automatic stay also prohibits collection actions and proceedings directed toward property of the bankruptcy estate itself.
In some courts violations of the stay are treated as void ab initio as a matter of law, although the court may annul the stay to give effect to otherwise void acts. Other courts treat violations as voidable (not necessarily void ab initio). Any violation of the stay may give rise to damages being assessed against the violating party. Non-willful violations of the stay are often excused without penalty, but willful violators are liable for punitive damages and may also be found to be in contempt of court.
A secured creditor may be allowed to take the applicable collateral if the creditor first obtains permission from the court. Permission is requested by a creditor by filing a motion for relief from the automatic stay. The court must either grant the motion or provide adequate protection to the secured creditor that the value of their collateral will not decrease during the stay.
Without the bankruptcy protection of the automatic stay creditors might race to the courthouse to improve their positions against a debtor. If the debtor's business were facing a temporary crunch, but were nevertheless viable in the long term, it might not survive a "run" by creditors. A run could also result in waste and unfairness among similarly situated creditors.
Bankruptcy Code 362(d) gives 4 ways that a creditor can get the automatic stay removed.
All avoidance actions attempt to limit the risk of the legal system accelerating the financial demise of a financially unstable debtor who has not yet declared bankruptcy. The bankruptcy system generally endeavors to reward creditors who continue to extend financing to debtors and discourage creditors from accelerating their debt collection efforts. Avoidance actions are some of the most obvious of the mechanisms to encourage this goal.
Despite the apparent simplicity of these rules, a number of exceptions exist in the context of each category of avoidance action.
s, created by what are called secured transactions
, are lien
s on the property of a debtor.
Unsecured creditors are generally divided into two classes: unsecured priority creditors and general unsecured creditors. Unsecured priority creditors are further subdivided into classes as described in the law. In some cases the assets of the estate are insufficient to pay all priority unsecured creditors in full; in such cases the general unsecured creditors receive nothing.
Because of the priority and rank ordering feature of bankruptcy law, debtors sometimes improperly collude with others (who may be related to the debtor) to prefer them, by for example granting them a security interest
in otherwised unpledged assets. For this reason, the bankruptcy trustee is permitted to reverse certain transactions of the debtor within period of time prior to the date of bankruptcy filing. The time period varies depending on the relationship of the parties to the debtor and the nature of the transaction.
If the Trustee (or debtor in possession, in many chapter 11 cases) rejects a contract, the debtor's bankruptcy estate is subject to ordinary breach of contract damages, but the damages
amount is an obligation and is generally treated as an unsecured claim.
Committees have daily communications with the debtor and the debtor's advisers and have access to a wide variety of documents as part of their functions and responsibilities.
The exemption laws vary greatly from state to state. In some states, exempt property includes equity in a home or car, tools of the trade, and some personal effects. In other states an asset class such as tools of trade will not be exempt by virtue of its class except to the extent it is claimed under a more general exemption for personal property.
One major purpose of bankruptcy is to ensure orderly and reasonable management of debt. Thus, exemptions for personal effects are thought to prevent punitive seizures of items of little or no economic value (personal effects, personal care
items, ordinary clothing), since this does not promote any desirable economic result. Similarly, tools of the trade may, depending on the available exemptions, be a permitted exemption as their continued possession allows the insolvent debtor to move forward into productive work as soon as possible.
The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 placed pension plans not subject to the Employee Retirement Income Security Act
of 1974 (ERISA), like 457 and 403(b) plans, in the same status as ERISA qualified plans with respect to having exemption status akin to spendthrift trusts. SEP-IRAs and SIMPLEs still are outside federal protection and must rely on state law.
. To prevent fraud, most states allow this protection only to the extent that the beneficiary did not transfer property to the trust. Also, such provisions do not protect cash or other property once it has been transferred from the trust to the beneficiary. Under the U.S. Bankruptcy Code, an anti-alienation provision in a spendthrift trust is recognized. This means that the beneficiary's share of the trust generally does not become property of the bankruptcy estate.
and the related "fresh start." Discharge is available in some but not all cases. For example, in a Chapter 7 case only an individual debtor (not a corporation, partnership, etc.) can receive a discharge.
The effect of a bankruptcy discharge is to eliminate only the debtor's personal liability, not the in rem liability for a secured debt to the extent of the value of collateral. The term "in rem" essentially means "with respect to the thing itself" (i.e., the collateral). For example, if a debt in the amount of $100,000 is secured by property having a value of only $80,000, the $20,000 deficiency is treated, in bankruptcy, as an unsecured claim (even though it's part of a "secured" debt). The $80,000 portion of the debt is treated as a secured claim. Assuming a discharge is granted and none of the $20,000 deficiency is paid (e.g., due to insufficiency of funds), the $20,000 deficiency—the debtor's personal liability—is discharged (assuming the debt is not non-dischargeable under another Bankruptcy Code provision). The $80,000 portion of the debt is the in rem liability, and it is not discharged by the court's discharge order. This liability can presumably be satisfied by the creditor taking the asset itself. An essential concept is that when commentators say that a debt is "dischargeable," they are referring only to the debtor's personal liability on the debt. To the extent that a liability is covered by the value of collateral, the debt is not discharged.
This analysis assumes, however, that the collateral does not increase in value after commencement of the case. If the collateral increases in value and the debtor (rather than the estate) keeps the collateral (e.g., where the asset is exempt or is abandoned by the trustee back to the debtor), the amount of the creditor's security interest may or may not increase. In situations where the debtor (rather than the creditor) is allowed to benefit from the increase in collateral value, the effect is called "lien stripping" or "paring down." Lien stripping is allowed only in certain cases depending on the kind of collateral and the particular chapter of the Code under which the discharge is granted.
The discharge also does not eliminate certain rights of a creditor to setoff (or "offset") certain mutual debts owed by the creditor to the debtor against certain claims of that creditor against the debtor, where both the debt owed by the creditor and the claim against the debtor arose prior to the commencement of the case.
Not every debt may be discharged under every chapter of the Code. Certain taxes
owed to Federal, state or local government, student loans, and child support
obligations are not dischargeable. (Guaranteed student loans are potentially dischargeable, however, if debtor prevails in a difficult-to-win adversary proceeding
against the lender commenced by a complaint to determine dischargeability. Also, the debtor can petition the court for a "financial hardship" discharge, but the grant of such discharges is rare.)
The debtor's liability on a secured debt, such as a mortgage or mechanic's lien on a home, may be discharged. The effects of the mortgage or mechanic's lien, however, cannot be discharged in most cases if the lien affixed prior to filing. Therefore, if the debtor wishes to retain the property, the debt must usually be paid for as agreed. (See also lien avoidance
, reaffirmation agreement
) (Note: there may be additional flexibility available in Chapter 13
for debtors dealing with oversecured collateral such as a financed auto, so long as the oversecured property is not the debtor's primary residence
.)
Any debt tainted by one of a variety of wrongful acts recognized by the Bankruptcy Code, including defalcation
, or consumer purchases or cash advances above a certain amount incurred a short time before filing, cannot be discharged. However, certain kinds of debt, such as debts incurred by way of fraud, may be dischargeable through the Chapter 13 super discharge. All in all, as of 2005, there are 19 general categories of debt that cannot be discharged in a Chapter 7
bankruptcy, and fewer debts that cannot be discharged under Chapter 13.
s and other deposit institutions, insurance
companies, railroads, and certain other financial institutions and entities regulated by the federal and state governments cannot be a debtor under the Bankruptcy Code. Instead, special state and federal laws govern the liquidation or reorganization of these companies. In the U.S. context at least, it is incorrect to refer to a bank or insurer as being "bankrupt". The terms "insolvent", "in liquidation", or "in receivership" would be appropriate under some circumstances.
(PBGC), a U.S. government corporation that insures certain defined benefit pension plan obligations, may assert liens in bankruptcy under either of two separate statutory provisions. The first is found in the Internal Revenue Code, at , which provides that liens held by the PBGC have the status of a tax lien. Under this provision, the unpaid mandatory pension contributions must exceed one million dollars for the lien to arise.
The second statute is , under which a PBGC lien has the status of a tax lien in bankruptcy. Under this provision, the lien may not exceed 30% of the net worth of all persons liable under a separate provision, .
In bankruptcy, PBGC liens (like Federal tax liens) generally are not valid against certain competing liens that were perfected before a notice of the PBGC lien was filed.
.
Bankruptcy fraud includes filing a bankruptcy petition or any other document in a bankruptcy case for the purpose of attempting to execute or conceal a scheme or artifice to defraud. Bankruptcy fraud also includes making a false or fraudulent representation, claim or promise in connection with a bankruptcy case, either before or after the commencement of the case, for the purpose of attempting to execute or conceal a scheme or artifice to defraud. Bankruptcy fraud is punishable by a fine, or by up to five years in prison, or both.
Knowingly and fraudulently concealing property of the estate from a custodian, trustee, marshal, or other court officer is a separate offense, and may also be punishable by a fine, or by up to five years in prison, or both. The same penalty may be imposed for knowingly and fraudulently concealing, destroying, mutilating, falsifying, or making a false entry in any books, documents, records, papers, or other recorded information relating to the property or financial affairs of the debtor after a case has been filed.
Certain offenses regarding fraud in connection with a bankruptcy case may also be classified as "racketeering activity" for purposes of the Racketeer Influenced and Corrupt Organizations Act
(RICO). Any person who receives income directly or indirectly derived from a "pattern" of such racketeering activity (generally, two or more offensive acts within a ten year period) and who uses or invests any part of that income in the acquisition, establishment, or operation of any enterprise engaged in (or affecting) interstate or foreign commerce may be punished by up to twenty years in prison.
Bankruptcy crimes are prosecuted by the United States Attorney
, typically after a reference from the United States Trustee, the case trustee, or a bankruptcy judge.
Bankruptcy fraud can also sometimes lead to criminal prosecution in state courts, under the charge of theft
of the goods or services
obtained by the debtor for which payment, in whole or in part, was evaded by the fraudulent bankruptcy filing.
, declined to apply state sovereign immunity
from Seminole Tribe v. Florida
, to defeat a trustee's action under to recover preferential transfers made by a debtor to a state agency. The Court ruled that Article I, section 8, clause 4 of the U.S. Constitution (empowering Congress to establish uniform laws on the subject of bankruptcy) abrogates the state's sovereign immunity in suits to recover preferential payments.
Although the individual causes of bankruptcy are complex and multifaceted, the majority of personal bankruptcies involve substantial medical bills.
Personal bankruptcies are typically filed under Chapter 7 or Chapter 13. Personal Chapter 11 bankruptcies are relatively rare.
The American Journal of Medicine says over 3 out of 5 personal bankruptcies are due to medical debt
.
$639 billion in assets.
The 20 largest corporate bankruptcies are as follows:
United States Constitution
The Constitution of the United States is the supreme law of the United States of America. It is the framework for the organization of the United States government and for the relationship of the federal government with the states, citizens, and all people within the United States.The first three...
(Article 1, Section 8, Clause 4) which authorizes Congress to enact "uniform Laws on the subject of Bankruptcies throughout the United States." Congress has exercised this authority several times since 1801, most recently by adopting the Bankruptcy Reform Act of 1978, codified in Title 11 of the United States Code
Title 11 of the United States Code
Title 11 of the United States Code is the primary source of bankruptcy law in the United States Code.-Contents:Title 11 is subdivided into nine chapters. It used to include more chapters, but some of them have since been repealed in their entirety...
, and commonly referred to as the Bankruptcy Code
Bankruptcy Code
Bankruptcy Code may refer to:*Bankruptcy in Canada*Bankruptcy in the United States or Title 11 of the United States Code *Bankruptcy in China*Bankruptcy in the United Kingdom...
("Code"). The Code has been amended several times since, with the most signficant recent changes enacted in 2005 through the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA). Some law relevant to bankruptcy is found in other parts of the United States Code. For example, bankruptcy crimes are found in Title 18 of the United States Code (Crimes). Tax implications of bankruptcy are found in Title 26 of the United States Code (Internal Revenue Code
Internal Revenue Code
The Internal Revenue Code is the domestic portion of Federal statutory tax law in the United States, published in various volumes of the United States Statutes at Large, and separately as Title 26 of the United States Code...
), and the creation and jurisdiction of bankruptcy courts are found in Title 28 of the United States Code
Title 28 of the United States Code
Title 28 is the portion of the United States Code that governs the federal judicial system.It is divided into six parts:* Part I: Organization of Courts* Part II: Department of Justice...
(Judiciary and Judicial procedure).
While bankruptcy cases are filed in United States Bankruptcy Court
United States bankruptcy court
United States bankruptcy courts are courts created under Article I of the United States Constitution. They function as units of the district courts and have subject-matter jurisdiction over bankruptcy cases. The federal district courts have original and exclusive jurisdiction over all cases arising...
(units of the United States District Court
United States district court
The United States district courts are the general trial courts of the United States federal court system. Both civil and criminal cases are filed in the district court, which is a court of law, equity, and admiralty. There is a United States bankruptcy court associated with each United States...
s), and federal law governs procedure in bankruptcy cases, state laws are often applied when determining property rights. For example, law governing the validity of liens or rules protecting certain property from creditors (known as exemptions), may derive from state law or federal law. Because state law plays a major role in many bankruptcy cases, it is often unwise to generalize some bankruptcy issues across state lines.
History
Before 1898, there were several short-lived federal bankruptcy laws in the U.S. The first was the act of 1800 which was repealed in 1803 and followed by the act of 1841, which was repealed in 1843, and then the act of 1867, which was amended in 1874 and repealed in 1878.The first modern Bankruptcy Act in America, sometimes called the "Nelson Act", was initially entered into force in 1898. The current Bankruptcy Code was enacted in 1978 by § 101 of the Bankruptcy Reform Act of 1978, and generally became effective on October 1, 1979. The current Code completely replaced the former Bankruptcy Act, the "Chandler Act" of 1938. The Chandler Act gave unprecedented authority to the Securities and Exchange Commission in the administration of bankruptcy filings. The current Code has been amended numerous times since 1978. See also the Bankruptcy Abuse Prevention and Consumer Protection Act
Bankruptcy Abuse Prevention and Consumer Protection Act
The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 , is a legislative act that made several significant changes to the United States Bankruptcy Code...
of 2005.
Chapters of the Bankruptcy Code
Entities seeking relief under the Bankruptcy Code may file a petition for relief under a number of different chapters of the Code, depending on circumstances. Title 11 contains nine chapters, six of which provide for the filing of a petition. The other three chapters provide rules governing bankruptcy cases in general. A case is typically referred to by the chapter under which the petition is filed. These chapters are described below.Chapter 7: Liquidation
Liquidation under a Chapter 7Chapter 7, Title 11, United States Code
Chapter 7 of the Title 11 of the United States Code governs the process of liquidation under the bankruptcy laws of the United States...
filing is the most common form of bankruptcy. Liquidation involves the appointment of a trustee who collects the non-exempt property of the debtor, sells it and distributes the proceeds to the creditors. Because each state allows for debtors to keep essential property, most Chapter 7 cases are "no asset" cases, meaning that there are not sufficient non-exempt assets to fund a distribution to creditors.
U.S. Bankruptcy law changed dramatically in 2005 with the passage of BAPCPA, which made it more difficult for consumer debtors to file bankruptcy in general and Chapter 7 in particular.
Advocates of BAPCPA claimed that its passage would reduce losses to creditors such as credit card companies, and that those creditors would then pass on the savings to other borrowers in the form of lower interest rates. Critic Michael Somkovic asserts that these claims turned out to be false. He charges that although credit card company losses decreased after passage of the Act, prices charged to customers increased, and credit card company profits soared.
Chapter 9: Reorganization for municipalities
A Chapter 9Chapter 9, Title 11, United States Code
Chapter 9, Title 11 of the United States Code is a chapter of the United States Bankruptcy Code, available exclusively to municipalities and assists them in the restructuring of debts...
bankruptcy is available only to municipalities
Municipality
A municipality is essentially an urban administrative division having corporate status and usually powers of self-government. It can also be used to mean the governing body of a municipality. A municipality is a general-purpose administrative subdivision, as opposed to a special-purpose district...
. Chapter 9 is a form of reorganization, not liquidation. A famous example of a municipal bankruptcy was in Orange County, California
Orange County, California
Orange County is a county in the U.S. state of California. Its county seat is Santa Ana. As of the 2010 census, its population was 3,010,232, up from 2,846,293 at the 2000 census, making it the third most populous county in California, behind Los Angeles County and San Diego County...
.
Chapters 11, 12, and 13: Reorganization
Bankruptcy under Chapter 11Chapter 11, Title 11, United States Code
Chapter 11 is a chapter of the United States Bankruptcy Code, which permits reorganization under the bankruptcy laws of the United States. Chapter 11 bankruptcy is available to every business, whether organized as a corporation or sole proprietorship, and to individuals, although it is most...
, Chapter 12
Chapter 12, Title 11, United States Code
Chapter 12 of Title 11 of the United States Code, or simply chapter 12, is a chapter of the Bankruptcy Code. It is similar to Chapter 13 in structure, but it offers additional benefits to farmers and fishermen in certain circumstances, beyond those available to ordinary wage earners...
, or Chapter 13
Chapter 13, Title 11, United States Code
Chapter 13 of the United States Bankruptcy Code, codified under Title 11 of the United States Code, governs a form of bankruptcy in the United States that allows individuals to undergo a financial reorganization supervised by a federal bankruptcy court. The goal of Chapter 13 is to enable...
is more complex reorganization and involves allowing the debtor to keep some or all of his or her property and to use future earnings to pay off creditors. Consumers usually file chapter 7 or chapter 13. Chapter 11 filings by individuals are allowed, but are rare. Chapter 12 is similar to Chapter 13 but is available only to "family farmers" and "family fisherman" in certain situations. Chapter 12 generally has more generous terms for debtors than a comparable Chapter 13 case would have available. As recently as mid-2004 Chapter 12 was scheduled to expire, but in late 2004 it was renewed and made permanent.
Chapter 15: Cross-border insolvency
The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 added Chapter 15Chapter 15, Title 11, United States Code
Chapter 15, Title 11, United States Code is a section of the United States bankruptcy code that deals with jurisdiction. Under Chapter 15 a representative of a corporate bankruptcy proceeding outside the U.S. can obtain access to the United States courts...
(as a replacement for section 304) and deals with cross-border insolvency: foreign companies with U.S. debts.
Voluntary versus involuntary bankruptcy
As a threshold matter, bankruptcy cases are either voluntary or involuntary. In voluntary bankruptcy cases, which account for the overwhelming majority of cases, debtors petition the bankruptcy court. With involuntary bankruptcy, creditors, rather than the debtor, file the petition in bankruptcy. Involuntary petitions are rare, however, and are occasionally used in business settings to force a company into bankruptcy so that creditors can enforce their rights.The estate
Commencement of a bankruptcy case creates an "estateEstate (law)
An estate is the net worth of a person at any point in time. It is the sum of a person's assets - legal rights, interests and entitlements to property of any kind - less all liabilities at that time. The issue is of special legal significance on a question of bankruptcy and death of the person...
." It is against this estate to which the debtor's creditors must look. The estate consists of all property interests of the debtor at the time of case commencement, subject to certain exclusions and exemptions. In the case of a married person in a community property
Community property
Community property is a marital property regime that originated in civil law jurisdictions and is now also found in some common law jurisdictions...
state, the estate may include certain community property interests of the debtor's spouse even if the spouse has not filed bankruptcy. The estate may also include other items, including but not limited to property acquired by will or inheritance within 180 days after case commencement.
For federal income tax
Income tax in the United States
In the United States, a tax is imposed on income by the Federal, most states, and many local governments. The income tax is determined by applying a tax rate, which may increase as income increases, to taxable income as defined. Individuals and corporations are directly taxable, and estates and...
purposes, the bankruptcy estate of an individual in a Chapter 7 or 11 case is a separate taxable entity from the debtor. The bankruptcy estate of a corporation, partnership, or other collective entity, or the estate of an individual in Chapters 12 or 13, is not a separate taxable entity from the debtor.
Bankruptcy court
In Northern Pipeline Co. v. Marathon Pipe Line Co.Northern Pipeline Co. v. Marathon Pipe Line Co.
Northern Pipeline Co. v. Marathon Pipe Line Co., 458 U.S. 50 , was a case in which the Supreme Court of the United States held that Article III jurisdiction could not be conferred on non-Article III courts Northern Pipeline Co. v. Marathon Pipe Line Co., 458 U.S. 50 (1982), was a case in which the...
, the United States Supreme Court held that certain provisions of the law relating to Article I bankruptcy judges (who are not life-tenured "Article III" judges) are unconstitutional. Congress responded in 1984 with changes to remedy constitutional defects. Under the revised law, bankruptcy judges in each judicial district constitute a "unit" of the applicable United States District Court
United States district court
The United States district courts are the general trial courts of the United States federal court system. Both civil and criminal cases are filed in the district court, which is a court of law, equity, and admiralty. There is a United States bankruptcy court associated with each United States...
. The judge is appointed for a term of 14 years by the United States Court of Appeals
United States court of appeals
The United States courts of appeals are the intermediate appellate courts of the United States federal court system...
for the circuit in which the applicable district is located.
The United States District Courts have subject-matter jurisdiction
Subject-matter jurisdiction
Subject-matter jurisdiction is the authority of a court to hear cases of a particular type or cases relating to a specific subject matter. For instance, bankruptcy court only has the authority to hear bankruptcy cases....
over bankruptcy matters. However, each such district court may, by order, "refer" bankruptcy matters to the Bankruptcy Court, and most district courts have a standing "reference" order to that effect, so that all bankruptcy cases are handled by the Bankruptcy Court. In unusual circumstances, a district court may "withdraw the reference" (i.e., taking a particular case or proceeding within the case away from the bankruptcy court) and decide the matter itself.
Decisions of the bankruptcy court are generally appealable to the district court, and then to the Court of Appeals. However, in a few jurisdictions a separate court called a Bankruptcy Appellate Panel
Bankruptcy Appellate Panel
A Bankruptcy Appellate Panel is a group of judges of the United States bankruptcy courts who are appointed to hear appeals from certain bankruptcy cases under the supervision of the United States courts of appeals....
(composed of bankruptcy judges) hears certain appeals from bankruptcy courts.
United States Trustee
The United States Attorney GeneralUnited States Attorney General
The United States Attorney General is the head of the United States Department of Justice concerned with legal affairs and is the chief law enforcement officer of the United States government. The attorney general is considered to be the chief lawyer of the U.S. government...
appoints a separate United States Trustee
United States Trustee Program
The United States Trustee Program is an agency of the United States Department of Justice that is responsible for overseeing the administration of bankruptcy cases and private trustees. The applicable federal law is found at 28 U.S.C. § 586 and 11 U.S.C. , et seq.In addition to the twenty-one...
for each of twenty-one geographical regions for a five year term. Each Trustee is removable from office by and works under the general supervision of the Attorney General. The U.S. Trustees maintain regional offices that correspond with federal judicial districts and are administratively overseen by the Executive Office for United States Trustees in Washington, D.C. Each United States Trustee, an officer of the U.S. Department of Justice, is responsible for maintaining and supervising a panel of private trustees for chapter 7 bankruptcy cases. The Trustee has other duties including the administration of most bankruptcy cases and trustees. Under section 307 of title 11, a U.S. Trustee "may raise and may appear and be heard on any issue in any case or proceeding" in bankruptcy except for filing a plan of reorganization in a chapter 11 case.
The Automatic stay
Bankruptcy Code § 362 imposes the automatic stayAutomatic stay
In bankruptcy law, an automatic stay is an automatic injunction that halts actions by creditors, with certain exceptions, to collect debts from a debtor who has declared bankruptcy. Under section 362 of the United States Bankruptcy Code, , the stay begins at the moment the bankruptcy petition is...
at the moment a bankruptcy petition is filed. The automatic stay generally prohibits the commencement, enforcement or appeal of actions and judgments, judicial or administrative, against a debtor for the collection of a claim that arose prior to the filing of the bankruptcy petition. The automatic stay also prohibits collection actions and proceedings directed toward property of the bankruptcy estate itself.
In some courts violations of the stay are treated as void ab initio as a matter of law, although the court may annul the stay to give effect to otherwise void acts. Other courts treat violations as voidable (not necessarily void ab initio). Any violation of the stay may give rise to damages being assessed against the violating party. Non-willful violations of the stay are often excused without penalty, but willful violators are liable for punitive damages and may also be found to be in contempt of court.
A secured creditor may be allowed to take the applicable collateral if the creditor first obtains permission from the court. Permission is requested by a creditor by filing a motion for relief from the automatic stay. The court must either grant the motion or provide adequate protection to the secured creditor that the value of their collateral will not decrease during the stay.
Without the bankruptcy protection of the automatic stay creditors might race to the courthouse to improve their positions against a debtor. If the debtor's business were facing a temporary crunch, but were nevertheless viable in the long term, it might not survive a "run" by creditors. A run could also result in waste and unfairness among similarly situated creditors.
Bankruptcy Code 362(d) gives 4 ways that a creditor can get the automatic stay removed.
Avoidance actions
Debtors, or the trustees that represent them, gain the ability to reject, or avoid actions taken with respect to the debtor's property for a specified time prior to the filing of the bankruptcy. While the details of avoidance actions are nuanced, there are three general categories of avoidance actions:- Preferences -
- Federal fraudulent transfer -
- Non-bankruptcy law creditor -
All avoidance actions attempt to limit the risk of the legal system accelerating the financial demise of a financially unstable debtor who has not yet declared bankruptcy. The bankruptcy system generally endeavors to reward creditors who continue to extend financing to debtors and discourage creditors from accelerating their debt collection efforts. Avoidance actions are some of the most obvious of the mechanisms to encourage this goal.
Despite the apparent simplicity of these rules, a number of exceptions exist in the context of each category of avoidance action.
Preferences
Preference actions generally permit the trustee to avoid (that is, to void an otherwise legally binding transaction) certain transfers of the debtor's property that benefit creditors where the transfers occur on or within 90 days of the date of filing of the bankruptcy petition. For example, if a debtor has a debt to a friendly creditor and a debt to an unfriendly creditor, and pays the friendly creditor, and then declares bankruptcy one week later, the trustee may be able to recover the money paid to the friendly creditor under 11 U.S.C. § 547. While this "reach back" period typically extends 90 days backwards from the date of the bankruptcy, the amount of time is longer in the case of "insiders" -- typically one year. Insiders include family and close business contacts of the debtor.Fraudulent transfer
Bankruptcy fraudulent transfer law is similar in practice to non-bankruptcy fraudulent transfer law. Some terms, however, are more generous in bankruptcy than they are otherwise. For instance, the statute of limitations within bankruptcy is two years as opposed to a shorter time frame in some non-bankruptcy contexts. Generally a fraudulent transfer action operates in much the same way as a preference avoidance. Fraudulent transfer actions, however, sometimes require a showing of intent to shelter the property from a creditor.Non-Bankruptcy law creditor - "Strong Arm"
The strong arm avoidance power stems from 11 U.S.C. § 544 and permits the trustee to exercise the rights that a debtor in the same situation would have under the relevant state law. Specifically, § 544(a) grants the trustee the rights of avoidance of (1) a judicial lien creditor, (2) an unsatisfied lien creditor, and (3) a bona fide purchaser of real property. In practice these avoidance powers often overlap with preference and fraudulent transfer avoidance powers.The creditors
Secured creditors whose security interests survive the commencement of the case may look to the property that is the subject of their security interests, after obtaining permission from the court (in the form of relief from the automatic stay). Security interestSecurity interest
A security interest is a property interest created by agreement or by operation of law over assets to secure the performance of an obligation, usually the payment of a debt. It gives the beneficiary of the security interest certain preferential rights in the disposition of secured assets...
s, created by what are called secured transactions
Secured transactions in the United States
Secured transactions in the United States are an important part of the law and economy of the country. By enabling lenders to take a security interest in collateral , the law of secured transactions provides lenders with assurance of legal relief in case of default by the borrower...
, are lien
Lien
In law, a lien is a form of security interest granted over an item of property to secure the payment of a debt or performance of some other obligation...
s on the property of a debtor.
Unsecured creditors are generally divided into two classes: unsecured priority creditors and general unsecured creditors. Unsecured priority creditors are further subdivided into classes as described in the law. In some cases the assets of the estate are insufficient to pay all priority unsecured creditors in full; in such cases the general unsecured creditors receive nothing.
Because of the priority and rank ordering feature of bankruptcy law, debtors sometimes improperly collude with others (who may be related to the debtor) to prefer them, by for example granting them a security interest
Security interest
A security interest is a property interest created by agreement or by operation of law over assets to secure the performance of an obligation, usually the payment of a debt. It gives the beneficiary of the security interest certain preferential rights in the disposition of secured assets...
in otherwised unpledged assets. For this reason, the bankruptcy trustee is permitted to reverse certain transactions of the debtor within period of time prior to the date of bankruptcy filing. The time period varies depending on the relationship of the parties to the debtor and the nature of the transaction.
Executory contracts
The bankruptcy trustee may reject certain executory contracts and unexpired leases. For bankruptcy purposes, a contract is generally considered executory when both parties to the contract have not yet fully performed a material obligation of the contract.If the Trustee (or debtor in possession, in many chapter 11 cases) rejects a contract, the debtor's bankruptcy estate is subject to ordinary breach of contract damages, but the damages
Damages
In law, damages is an award, typically of money, to be paid to a person as compensation for loss or injury; grammatically, it is a singular noun, not plural.- Compensatory damages :...
amount is an obligation and is generally treated as an unsecured claim.
Committees
Under some chapters, notably chapters 7, 9 and 11, committees of various stakeholders are appointed by the bankruptcy court. In Chapter 11 and 9, these committees consist of entities that hold the seven largest claims of the kinds represented by the committee. Other committees may also be appointed by the court.Committees have daily communications with the debtor and the debtor's advisers and have access to a wide variety of documents as part of their functions and responsibilities.
Exempt property
Although in theory all property of the debtor that is not excluded from the estate under the Bankruptcy Code becomes property of the estate (i.e., is automatically transferred from the debtor to the estate) at the time of commencement of a case, an individual debtor (not a partnership, corporation, etc.) may claim certain items of property as "exempt" and thereby keep those items (subject, however, to any valid liens or other encumbrances). An individual debtor may choose between a "federal" list of exemptions and the list of exemptions provided by the law of the state in which the debtor files the bankruptcy case unless the state in which the debtor files the bankruptcy case has enacted legislation prohibiting the debtor from choosing the exemptions on the federal list. Almost 40 states have done so. In states where the debtor is allowed to choose between the federal and state exemptions, the debtor has the opportunity to choose the exemptions that most fully benefit him or her and, in many cases, may convert at least some of his or her property from non-exempt form (e.g. cash) to exempt form (e.g. increased equity in a home created by using the cash to pay down a mortgage) prior to filing the bankruptcy case.The exemption laws vary greatly from state to state. In some states, exempt property includes equity in a home or car, tools of the trade, and some personal effects. In other states an asset class such as tools of trade will not be exempt by virtue of its class except to the extent it is claimed under a more general exemption for personal property.
One major purpose of bankruptcy is to ensure orderly and reasonable management of debt. Thus, exemptions for personal effects are thought to prevent punitive seizures of items of little or no economic value (personal effects, personal care
Hygiene
Hygiene refers to the set of practices perceived by a community to be associated with the preservation of health and healthy living. While in modern medical sciences there is a set of standards of hygiene recommended for different situations, what is considered hygienic or not can vary between...
items, ordinary clothing), since this does not promote any desirable economic result. Similarly, tools of the trade may, depending on the available exemptions, be a permitted exemption as their continued possession allows the insolvent debtor to move forward into productive work as soon as possible.
The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 placed pension plans not subject to the Employee Retirement Income Security Act
Employee Retirement Income Security Act
The Employee Retirement Income Security Act of 1974 is an American federal statute that establishes minimum standards for pension plans in private industry and provides for extensive rules on the federal income tax effects of transactions associated with employee benefit plans...
of 1974 (ERISA), like 457 and 403(b) plans, in the same status as ERISA qualified plans with respect to having exemption status akin to spendthrift trusts. SEP-IRAs and SIMPLEs still are outside federal protection and must rely on state law.
Spendthrift trusts
Most states have property laws that allow a trust agreement to contain a legally enforceable restriction on the transfer of a beneficial interest in the trust (sometimes known as an "anti-alienation provision"). The anti-alienation provision generally prevents creditors of a beneficiary from acquiring the beneficiary's share of the trust. Such a trust is sometimes called a spendthrift trustSpendthrift trust
A spendthrift trust is a trust that is created for the benefit of a person that gives an independent trustee full authority to make decisions as to how the trust funds may be spent for the benefit of the beneficiary...
. To prevent fraud, most states allow this protection only to the extent that the beneficiary did not transfer property to the trust. Also, such provisions do not protect cash or other property once it has been transferred from the trust to the beneficiary. Under the U.S. Bankruptcy Code, an anti-alienation provision in a spendthrift trust is recognized. This means that the beneficiary's share of the trust generally does not become property of the bankruptcy estate.
Redemption
In a Chapter 7 liquidation case, an individual debtor may redeem certain "tangible personal property intended primarily for personal, family, or household use" that is encumbered by a lien. To qualify, the property generally either (A) must be exempt under section 522 of the Bankruptcy Code, or (B) must have been abandoned by the trustee under section 554 of the Bankruptcy Code. To redeem the property, the debtor must pay the lienholder the full amount of the applicable allowed secured claim against the property.Debtor's discharge
Key concepts in bankruptcy include the debtor's dischargeBankruptcy discharge
A discharge in United States bankruptcy law, when referring to a debtor's discharge, is a statutory injunction against the commencement or continuation of an action to collect, recover or offset a debt as a personal liability of the debtor...
and the related "fresh start." Discharge is available in some but not all cases. For example, in a Chapter 7 case only an individual debtor (not a corporation, partnership, etc.) can receive a discharge.
The effect of a bankruptcy discharge is to eliminate only the debtor's personal liability, not the in rem liability for a secured debt to the extent of the value of collateral. The term "in rem" essentially means "with respect to the thing itself" (i.e., the collateral). For example, if a debt in the amount of $100,000 is secured by property having a value of only $80,000, the $20,000 deficiency is treated, in bankruptcy, as an unsecured claim (even though it's part of a "secured" debt). The $80,000 portion of the debt is treated as a secured claim. Assuming a discharge is granted and none of the $20,000 deficiency is paid (e.g., due to insufficiency of funds), the $20,000 deficiency—the debtor's personal liability—is discharged (assuming the debt is not non-dischargeable under another Bankruptcy Code provision). The $80,000 portion of the debt is the in rem liability, and it is not discharged by the court's discharge order. This liability can presumably be satisfied by the creditor taking the asset itself. An essential concept is that when commentators say that a debt is "dischargeable," they are referring only to the debtor's personal liability on the debt. To the extent that a liability is covered by the value of collateral, the debt is not discharged.
This analysis assumes, however, that the collateral does not increase in value after commencement of the case. If the collateral increases in value and the debtor (rather than the estate) keeps the collateral (e.g., where the asset is exempt or is abandoned by the trustee back to the debtor), the amount of the creditor's security interest may or may not increase. In situations where the debtor (rather than the creditor) is allowed to benefit from the increase in collateral value, the effect is called "lien stripping" or "paring down." Lien stripping is allowed only in certain cases depending on the kind of collateral and the particular chapter of the Code under which the discharge is granted.
The discharge also does not eliminate certain rights of a creditor to setoff (or "offset") certain mutual debts owed by the creditor to the debtor against certain claims of that creditor against the debtor, where both the debt owed by the creditor and the claim against the debtor arose prior to the commencement of the case.
Not every debt may be discharged under every chapter of the Code. Certain taxes
Taxation in the United States
The United States is a federal republic with autonomous state and local governments. Taxes are imposed in the United States at each of these levels. These include taxes on income, property, sales, imports, payroll, estates and gifts, as well as various fees.Taxes are imposed on net income of...
owed to Federal, state or local government, student loans, and child support
Child support
In family law and public policy, child support is an ongoing, periodic payment made by a parent for the financial benefit of a child following the end of a marriage or other relationship...
obligations are not dischargeable. (Guaranteed student loans are potentially dischargeable, however, if debtor prevails in a difficult-to-win adversary proceeding
Adversary proceeding
An Adversary proceeding in bankruptcy, is a lawsuit in the American legal system filed by a party called a "plaintiff" against a party called a "defendant".-Procedure:...
against the lender commenced by a complaint to determine dischargeability. Also, the debtor can petition the court for a "financial hardship" discharge, but the grant of such discharges is rare.)
The debtor's liability on a secured debt, such as a mortgage or mechanic's lien on a home, may be discharged. The effects of the mortgage or mechanic's lien, however, cannot be discharged in most cases if the lien affixed prior to filing. Therefore, if the debtor wishes to retain the property, the debt must usually be paid for as agreed. (See also lien avoidance
Lien avoidance
In bankruptcy the debtor, by way of a Motion to Avoid Lien, can avoid certain liens that attached to the debtor's exempt property prior to the filing of the bankruptcy petition. This action is often used to clear title to land from a judgment lien arising out of pre-petition activity in a state...
, reaffirmation agreement
Reaffirmation agreement
A reaffirmation agreement in United States bankruptcy law refers to an agreement made between a creditor and the debtor that waives discharge of a debt that would otherwise be discharged in the pending bankruptcy proceeding. A properly executed, timely filed reaffirmation agreement modifies the...
) (Note: there may be additional flexibility available in Chapter 13
Chapter 13, Title 11, United States Code
Chapter 13 of the United States Bankruptcy Code, codified under Title 11 of the United States Code, governs a form of bankruptcy in the United States that allows individuals to undergo a financial reorganization supervised by a federal bankruptcy court. The goal of Chapter 13 is to enable...
for debtors dealing with oversecured collateral such as a financed auto, so long as the oversecured property is not the debtor's primary residence
Primary residence
A person's primary residence is the dwelling where they usually live, typically a house or an apartment. A person can only have one primary residence at any given time, though they may share the residence with other people...
.)
Any debt tainted by one of a variety of wrongful acts recognized by the Bankruptcy Code, including defalcation
Defalcation
A defalcation is an amount of funds misappropriated by a person trusted with its charge; also, the act of misappropriation, or an instance thereof...
, or consumer purchases or cash advances above a certain amount incurred a short time before filing, cannot be discharged. However, certain kinds of debt, such as debts incurred by way of fraud, may be dischargeable through the Chapter 13 super discharge. All in all, as of 2005, there are 19 general categories of debt that cannot be discharged in a Chapter 7
Chapter 7, Title 11, United States Code
Chapter 7 of the Title 11 of the United States Code governs the process of liquidation under the bankruptcy laws of the United States...
bankruptcy, and fewer debts that cannot be discharged under Chapter 13.
Entities that cannot be debtors
The section of the Bankruptcy code that governs which entities are permitted to file a bankruptcy petition is . BankBank
A bank is a financial institution that serves as a financial intermediary. The term "bank" may refer to one of several related types of entities:...
s and other deposit institutions, insurance
Insurance
In law and economics, insurance is a form of risk management primarily used to hedge against the risk of a contingent, uncertain loss. Insurance is defined as the equitable transfer of the risk of a loss, from one entity to another, in exchange for payment. An insurer is a company selling the...
companies, railroads, and certain other financial institutions and entities regulated by the federal and state governments cannot be a debtor under the Bankruptcy Code. Instead, special state and federal laws govern the liquidation or reorganization of these companies. In the U.S. context at least, it is incorrect to refer to a bank or insurer as being "bankrupt". The terms "insolvent", "in liquidation", or "in receivership" would be appropriate under some circumstances.
Status of certain defined benefit pension plan liabilities in bankruptcy
The Pension Benefit Guaranty CorporationPension Benefit Guaranty Corporation
The Pension Benefit Guaranty Corporation is an independent agency of the United States government that was created by the Employee Retirement Income Security Act of 1974 to encourage the continuation and maintenance of voluntary private defined benefit pension plans, provide timely and...
(PBGC), a U.S. government corporation that insures certain defined benefit pension plan obligations, may assert liens in bankruptcy under either of two separate statutory provisions. The first is found in the Internal Revenue Code, at , which provides that liens held by the PBGC have the status of a tax lien. Under this provision, the unpaid mandatory pension contributions must exceed one million dollars for the lien to arise.
The second statute is , under which a PBGC lien has the status of a tax lien in bankruptcy. Under this provision, the lien may not exceed 30% of the net worth of all persons liable under a separate provision, .
In bankruptcy, PBGC liens (like Federal tax liens) generally are not valid against certain competing liens that were perfected before a notice of the PBGC lien was filed.
Bankruptcy crimes
In the United States, criminal provisions relating to bankruptcy fraud and other bankruptcy crimes are found in sections 151 through 158 of Title 18 of the United States CodeUnited States Code
The Code of Laws of the United States of America is a compilation and codification of the general and permanent federal laws of the United States...
.
Bankruptcy fraud includes filing a bankruptcy petition or any other document in a bankruptcy case for the purpose of attempting to execute or conceal a scheme or artifice to defraud. Bankruptcy fraud also includes making a false or fraudulent representation, claim or promise in connection with a bankruptcy case, either before or after the commencement of the case, for the purpose of attempting to execute or conceal a scheme or artifice to defraud. Bankruptcy fraud is punishable by a fine, or by up to five years in prison, or both.
Knowingly and fraudulently concealing property of the estate from a custodian, trustee, marshal, or other court officer is a separate offense, and may also be punishable by a fine, or by up to five years in prison, or both. The same penalty may be imposed for knowingly and fraudulently concealing, destroying, mutilating, falsifying, or making a false entry in any books, documents, records, papers, or other recorded information relating to the property or financial affairs of the debtor after a case has been filed.
Certain offenses regarding fraud in connection with a bankruptcy case may also be classified as "racketeering activity" for purposes of the Racketeer Influenced and Corrupt Organizations Act
Racketeer Influenced and Corrupt Organizations Act
The Racketeer Influenced and Corrupt Organizations Act, commonly referred to as the RICO Act or simply RICO, is a United States federal law that provides for extended criminal penalties and a civil cause of action for acts performed as part of an ongoing criminal organization...
(RICO). Any person who receives income directly or indirectly derived from a "pattern" of such racketeering activity (generally, two or more offensive acts within a ten year period) and who uses or invests any part of that income in the acquisition, establishment, or operation of any enterprise engaged in (or affecting) interstate or foreign commerce may be punished by up to twenty years in prison.
Bankruptcy crimes are prosecuted by the United States Attorney
United States Attorney
United States Attorneys represent the United States federal government in United States district court and United States court of appeals. There are 93 U.S. Attorneys stationed throughout the United States, Puerto Rico, the U.S. Virgin Islands, Guam, and the Northern Mariana Islands...
, typically after a reference from the United States Trustee, the case trustee, or a bankruptcy judge.
Bankruptcy fraud can also sometimes lead to criminal prosecution in state courts, under the charge of theft
Theft
In common usage, theft is the illegal taking of another person's property without that person's permission or consent. The word is also used as an informal shorthand term for some crimes against property, such as burglary, embezzlement, larceny, looting, robbery, shoplifting and fraud...
of the goods or services
Theft of services
Theft of services is the legal term for a crime which is committed when a person obtains valuable services — as opposed to goods — by deception, force, threat or other unlawful means, i.e., without lawfully compensating the provider of said services...
obtained by the debtor for which payment, in whole or in part, was evaded by the fraudulent bankruptcy filing.
Bankruptcy and Federalism
On January 23, 2006, the Supreme Court, in Central Virginia Community College v. KatzCentral Virginia Community College v. Katz
Central Virginia Community College v. Katz, 546 U.S. 356 , is a United States Supreme Court case holding that the Bankruptcy Clause of the Constitution abrogates state sovereign immunity...
, declined to apply state sovereign immunity
Sovereign immunity
Sovereign immunity, or crown immunity, is a legal doctrine by which the sovereign or state cannot commit a legal wrong and is immune from civil suit or criminal prosecution....
from Seminole Tribe v. Florida
Seminole Tribe v. Florida
Seminole Tribe of Florida v. Florida, 517 U.S. 44 , was a United States Supreme Court case which held that Article One of the U.S. Constitution did not give the United States Congress the power to abrogate the sovereign immunity of the states that is further protected under the Eleventh Amendment...
, to defeat a trustee's action under to recover preferential transfers made by a debtor to a state agency. The Court ruled that Article I, section 8, clause 4 of the U.S. Constitution (empowering Congress to establish uniform laws on the subject of bankruptcy) abrogates the state's sovereign immunity in suits to recover preferential payments.
Social and economic factors
In 2008, there were 1,117,771 bankruptcy filings in the United States courts. Of those, 744,424 were chapter 7 bankruptcies, while 362,762 were chapter 13.Personal bankruptcy
Personal bankruptcies may be caused by a number of factors. In 2008, over 96% of all bankruptcy filings were non-business filings, and of those, approximately two-thirds were chapter 7 cases.Although the individual causes of bankruptcy are complex and multifaceted, the majority of personal bankruptcies involve substantial medical bills.
Personal bankruptcies are typically filed under Chapter 7 or Chapter 13. Personal Chapter 11 bankruptcies are relatively rare.
The American Journal of Medicine says over 3 out of 5 personal bankruptcies are due to medical debt
Medical debt
Medical debt refers to debt incurred by individuals due to health care costs and related expenses.Medical debt is different from other forms of debt, because it is usually incurred accidentally or faultlessly...
.
Largest bankruptcies
The largest bankruptcy in U.S. history occurred on September 15, 2008, when Lehman Brothers Holdings Inc. filed for Chapter 11 protection with more than USDUnited States dollar
The United States dollar , also referred to as the American dollar, is the official currency of the United States of America. It is divided into 100 smaller units called cents or pennies....
$639 billion in assets.
The 20 largest corporate bankruptcies are as follows:
| Company | Bankruptcy Date | Total Assets Pre-Bankruptcy | Description |
|---|---|---|---|
| Lehman Brothers Holdings, Inc. | 9/15/2008 | $691,063,000,000 | Investment Bank |
| Washington Mutual Washington Mutual Washington Mutual, Inc. , abbreviated to WaMu, was a savings bank holding company and the former owner of Washington Mutual Bank, which was the United States' largest savings and loan association until its collapse in 2008.... |
9/26/2008 | $327,913,000,000 | Savings & Loan Holding Co. |
| Worldcom, Inc. | 7/21/2002 | $103,914,000,000 | Telecommunications |
| General Motors General Motors General Motors Company , commonly known as GM, formerly incorporated as General Motors Corporation, is an American multinational automotive corporation headquartered in Detroit, Michigan and the world's second-largest automaker in 2010... |
6/1/2009 | $82,290,000,000 | Manufactures & Sells Cars |
| CIT Group | 11/1/2009 | $71,000,000,000 | Banking Holding Company |
| Enron Corp. | 12/02/2001 | $65,503,000,000 | Energy Trading, Natural Gas |
| Conseco, Inc. | 12/17/2002 | $61,392,000,000 | Financial Services Holding Co. |
| MF Global MF Global MF Global , formerly known as Man Financial, was a major global financial derivatives broker. MF Global provided exchange-traded derivatives, such as futures and options as well as over-the-counter products such as contracts for difference , foreign exchange and spread betting. MF Global was... |
11/08/2011 | $41,000,000,000 | Financial Derivatives Broker |
| Chrysler Chrysler Chrysler Group LLC is a multinational automaker headquartered in Auburn Hills, Michigan, USA. Chrysler was first organized as the Chrysler Corporation in 1925.... |
4/30/2009 | $39,300,000,000 | Manufactures & Sells Cars |
| Thornburg Mortgage Thornburg Mortgage Thornburg Mortgage Inc., , was an American publicly traded corporation headquartered in Santa Fe, New Mexico. Founded in 1993, the company is a real estate investment trust that originates, acquires & manages mortgages, with a specific focus on jumbo and super jumbo adjustable rate mortgages... |
5/01/2009 | $36,521,000,000 | Residential Mortgage Lending Company |
| Pacific Gas and Electric Co. | 4/06/2001 | $36,152,000,000 | Electricity & Natural Gas |
| Texaco Texaco Texaco is the name of an American oil retail brand. Its flagship product is its fuel "Texaco with Techron". It also owns the Havoline motor oil brand.... |
4/12/1987 | $34,940,000,000 | Petroleum & Petrochemicals |
| Financial Corp of America | 9/09/1988 | $33,864,000,000 | Financial Services & Savings and Loans |
| Refco Refco Refco was a New York-based financial services company, primarily known as a broker of commodities and futures contracts. It was founded in 1969 as "Ray E. Friedman and Co." Prior to its collapse in October, 2005, the firm had over $4 billion in approximately 200,000 customer accounts, and it was... |
10/17/2005 | $33,333,000,000 | Brokerage Services |
| IndyMac Bancorp | 7/31/2008 | $32,734,000,000 | Bank Holding Company |
| Global Crossing Global Crossing Global Crossing Limited was a telecommunications company that provides computer networking services worldwide. It maintained a large backbone and offered transit and peering links, VPN, leased lines, audio and video conferencing, long distance telephone, managed services, dialup, colocation and... |
1/28/2002 | $30,185,000,000 | Global telecommunications Carrier |
| Bank of New England Bank of New England The Bank of New England Corporation was a regional banking institution based in Boston, Massachusetts, which was seized by the Federal Deposit Insurance Corporation in 1991 as a result of heavy losses in its loan portfolio and was placed into Chapter 7 liquidation... |
1/07/1991 | $29,773,000,000 | Interstate Bank Holding Company |
| General Growth Properties General Growth Properties General Growth Properties, Inc. is a publicly traded real estate investment trust in the United States. It is based in Chicago, Illinois at 110 North Wacker Drive, a historic building designed by architectural firm Graham, Anderson, Probst & White... |
4/16/2009 | $29,557,000,000 | Real Estate Investment Company |
| Lyondell Chemical | 1/06/2009 | $27,392,000,000 | Global Manufacturer of Chemicals |
| Calpine Calpine Calpine Corporation is a Fortune 500 power company founded in 1984 in San Jose, California.Calpine's headquarters were permanently moved from San Jose to Houston, Texas in 2009. The company's stock was traded on the New York Stock Exchange under the symbol CPN until it was delisted on December 5,... |
12/20/2005 | $27,216,000,000 | Integrated Power Company |
External links
- United States Bankruptcy Courts via uscourts.gov
- Title 11 of the U.S. Code (including links to forms) via gpo.gov
- Title 11 of the U.S. Code via cornell.edu
- Bankruptcy Reform Page via uscourts.gov
- American Bankruptcy Institute
- U.S Bankruptcy Faqs
- NACBA National Association of Consumer Bankruptcy Attorneys
- Nolo Press Bankruptcy Resource Center
- The National Bankruptcy Archives at the University of Pennsylvania Law School
- Rules of Bankruptcy Procedure
- Local Bankruptcy Rules