Sacramento Bankruptcy Attorneys

Article I, Section 8, of the United States

Constitution authorizes Congress to enact

“uniform Laws on the subject of

Bankruptcies.” Under this grant of authority,

Congress enacted the “Bankruptcy Code” in

1978. The Bankruptcy Code, which is

codified as title 11 of the United States Code,

has been amended several times since its

enactment. It is the uniform federal law that

governs all bankruptcy cases.

The procedural aspects of the bankruptcy

process are governed by the Federal Rules of

Bankruptcy Procedure (often called the

“Bankruptcy Rules”) and local rules of each

bankruptcy court. The Bankruptcy Rules

contain a set of official forms for use in

bankruptcy cases. The Bankruptcy Code and

Bankruptcy Rules (and local rules) set forth

the formal legal procedures for dealing with

the debt problems of individuals and

businesses.

There is a bankruptcy court for each judicial

district in the country. Each state has one or

more districts. There are 90 bankruptcy

districts across the country. The bankruptcy

courts generally have their own clerk’s

offices.

The court official with decision-making

power over federal bankruptcy cases is the

United States bankruptcy judge, a judicial

officer of the United States district court. The

bankruptcy judge may decide any matter

connected with a bankruptcy case, such as

eligibility to file or whether a debtor should

receive a 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 to oversee the case.

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 U.S. 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.

A fundamental goal of the federal bankruptcy

laws enacted by Congress is to give debtors a

financial “fresh start” from burdensome debts.

The Supreme Court made this point about the

purpose of the bankruptcy law in a 1934

decision:

[I]t 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, 244

(1934). This goal is accomplished through the

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. This

publication describes the bankruptcy

discharge in a question and answer format,

discussing the timing of the discharge, the

scope of the discharge (what debts are

discharged and what debts are not

discharged), objections to discharge, and

revocation of the discharge. It also describes

what a debtor can do if a creditor attempts to

collect a discharged debt after the bankruptcy

case is concluded.

Six basic types of bankruptcy cases are

provided for under the Bankruptcy Code, each

of which is discussed in this publication. The

cases are traditionally given the names of the

chapters that describe them.

Chapter 7, entitled Liquidation, contemplates

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 most 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 for chapter 7 relief.

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 because it allows the debtor to

propose a “plan” to repay creditors over time

– usually three to five 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. The debtor

must complete the payments required under

the plan before the discharge is received. 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.

Chapter 11, entitled Reorganization,

ordinarily is used by commercial enterprises

that desire to continue operating a business

and repay creditors concurrently through a

court-approved plan of reorganization. The

chapter 11 debtor usually has the exclusive

right to file a plan of reorganization for the

first 120 days after it files the case and must

provide creditors with a disclosure statement

containing information adequate to enable

creditors to evaluate the plan. The court

ultimately approves (confirms) or disapproves

the plan of reorganization. Under the

confirmed plan, the debtor 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.

Chapter 12, entitled Adjustment of Debts of a

Family Farmer or Fisherman with Regular

Annual Income, provides debt relief to family

farmers and fishermen with regular income.

The process under chapter 12 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 three years unless the

court approves a longer period, not exceeding

five 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 the business while the

plan is being carried out.

Chapter 9, entitled Adjustment of Debts of a

Municipality, provides essentially for

reorganization, much like a reorganization

under chapter 11. Only a “municipality” may

file under chapter 9, which includes cities and

towns, as well as villages, counties, taxing

districts, municipal utilities, and school

districts.

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. 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.

In addition to the basic types of bankruptcy

cases, Bankruptcy Basics provides an

overview of the Servicemembers’ Civil Relief

Act, which, among other things, provides

protection to members of the military against

the entry of default judgments and gives the

court the ability to stay proceedings against

military debtors.

This publication also contains a description of

liquidation proceedings under the Securities

Investor Protection Act (“SIPA”). Although

the Bankruptcy Code provides for a

stockbroker liquidation proceeding, it is far

more likely that a failing brokerage firm will

find itself involved in a SIPA proceeding. The

purpose of SIPA is to return to investors

securities and cash left with failed brokerages.

Since being established by Congress in 1970,

the Securities Investor Protection Corporation

has protected investors who deposit stocks

and bonds with brokerage firms by ensuring

that every customer’s property is protected, up

to $500,000 per customer.

The bankruptcy process is complex and relies

on legal concepts like the “automatic stay,”

“discharge,” “exemptions,” and “assume.”

Therefore, the final chapter of this publication

is a glossary of Bankruptcy Terminology

which explains, in layman’s terms, most of the

legal concepts that apply in cases filed under

the Bankruptcy Code.