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 found in title 11 of the United States Code, has been amended several times since its enactment, most notably in 2005 with the enactment of the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA).
The Bankruptcy Code consists of nine chapters - numbered 1, 3, 5, 7, 9, 11, 12, 13, and 15. Chapters 1, 3, and 5 contain provisions that apply to all chapters. Chapter 1 contains definitions, Chapter 3 sets forth rules for the administration of the bankruptcy estate, and Chapter 5 provides for the creditors' rights and claims, the avoidance powers of the Trustee, the effect of a discharge, objections to discharge, and property of the estate. Chapters 9, 12, and 15 are rare and will not be discussed at length here. Chapter 9 provides for the reorganization of a municipality. Chapter 12 provides for a family farmer or family fisherman rehabilitation, and Chapter 15 is for cross-border bankruptcy proceedings. The remaining chapters - 7, 11, and 13 - provide for the three most common types of bankruptcy cases and are explained in greater detail below.
Chapter 7 is a straight liquidation and is usually what people think of when they think of bankruptcy. A trustee is appointed who is charged with collecting and liquidating the debtor's non-exempt assets and distributing any funds to creditors. Most individual chapter 7 cases are "no asset" cases, meaning that the Debtor does not own anything that the trustee can legally take, so the debtor will receive a discharge without having to pay anything to unsecured creditors. If the debtor does have non-exempt assets, those assets will be sold and the proceeds will be distributed to creditors. An individual debtor will then generally receive a discharge of remaining debts, while a business debtor will simply be shut down.
Chapter 11 is a reorganization in which the debtor proposes a plan to repay creditors. It is usually for corporations or wealthy individuals. The debtor has a 120-day period during which it has the exclusive right to file a plan of reorganization. After that, a creditor or the case trustee, if one has been appointed, can file a plan. In the case of a small business, the "exclusivity period" is 180 days. Any party in interest may file an objection to confirmation of a plan. The Bankruptcy Code Requires the court, after notice, to hold a hearing on confirmation of a plan. In order to confirm a plan, the court must find, among other things, that: (1) the plan is feasible; (2) it is proposed in good faith; and (3) the plan and the proponent of the plan are in compliance with the Bankruptcy Code.
Chapter 13 is a rehabilitation that is available only to individuals with regular income and no more than $360,475 in unsecured debt and no more than $1,081,400 in secured debt. Chapter 13 involves a plan to make payments to the trustee over 3 to 5 years. Unless the court grants an extension, the debtor must file a repayment plan with the petition or within 15 days after the petition is filed. A plan must be submitted for court approval and must provide for payments of fixed amounts to the trustee on a regular basis, typically monthly. The trustee then distributes the funds to creditors according to the terms of the plan, which may offer creditors less than full payment on their claims.