Bankruptcy Guide

An Unofficial Guide from M. Hedayat & Associates, P.C.

GenerallyWhat is it?

Bankruptcy is the Federal process that grants relief from debt for the person or entity that owes money (the Debtor) to the person or entity that gave them a loan or credit in the first place (the Creditor). Since the process is run by the Federal government it operates in largely the same way all over the country with certain differences by State and County in the way the system is carried out. Long-story short, if you know Bankruptcy is one State you probably know it in nearly all States.

Who Can be a Debtor?

The benefits of the Bankruptcy Code are available to a municipality or to any person or company that resides or has a domicile, a place of business, or property in the United States. This means that any foreign company that has property or a place of business in the United States may file a bankruptcy petition in the United States. The Bankruptcy Code is not available to insurance companies, banks, and similar institutions. These entities are subject to reorganization or liquidation under the laws of the individual states where they are incorporated or under other federal statutory methods.

Structure of the Bankruptcy Code and Rules

The Bankruptcy Code is divided into eight chapters, all of which have odd numbers (except for Chapter 12). This peculiar numbering system was devised in order to allow for future expansion.

Chapter 1: “General Provisions” This Chapter contains a number of definitions which apply throughout the Bankruptcy Code (§101), as well as important provisions concerning the broad powers of the bankruptcy courts to administer bankruptcy cases (§105), and definitions of what types of legal entities may and may not be debtors under the Bankruptcy Code (§109).

Chapter 3: “Case Administration” This Chapter contains provisions for how a bankruptcy case is commenced (§§301–304); how trustees, attorneys, and other professionals are retained and paid (§§326–331); and how creditors meet at the beginning of a case (§341). This Chapter also has several critical sections concerning the nature and scope of the automatic stay (§362); the ability of a debtor to use, sell, or lease its property during the case (§363); the ability of a debtor to borrow money during the case (§ 364); and the treatment of executory contracts and unexpired leases during the case (§365). This chapter also describes the requirement that a Debtor provide adequate protection to creditors for actions which may otherwise impair their interests (§361).

Chapter 5: “Creditors, the Debtor, and the Estate” This Chapter deals with the means for filing and litigating claims against the debtor (§§501–505); establishes priorities of secured and unsecured debts (§§506–510); provides for the discharge of the Debtor and the effects of such discharge (§§521–525); and determines the extent of the property of the Debtor’s estate, including the recovery of fraudulent and preferential transfers (§§541–554). Chapter 5 also contains special provisions for the liquidation of certain specialized financial contracts during a bankruptcy case (§§555–560).

Chapter 7: “Liquidation” This chapter provides the mechanism for conducting a liquidation case of an individual or business entity. This Chapter provides for the appointment or election of a trustee for the estate (§§701–704) and the collection and liquidation of the assets of the estate (§§721-728). There are also special provisions for liquidation of stockbrokers (§§741–752), commodity brokers (§§761–766), and clearing banks (§§781–784).

Chapter 9: “Adjustment of the Debts of a Municipality” This chapter deals with the filing, administration, and resolution of a bankruptcy case filed by a municipal entity. In many respects Chapter 9 cases resemble Chapter 11 cases.

Chapter 11: “Reorganization” This chapter provides the means for proceeding with a Chapter 11 case, forming a committee of unsecured creditors, and appointing a trustee if one is warranted (§§ 1101 –1108). This Chapter also describes the requirements for filing, confirming, and implementing a plan of reorganization (§§1121–1146). Finally, this Chapter has a special (but little-used) provision for reorganizing a railroad company (§§1161–1174).

Chapter 12: “Adjustment of Debts of a Family Farmer with Regular Annual Income” This chapter provides the special requirements for a family farmer to reorganize her business. These provisions are also similar to those found in Chapter 11.

Chapter 13: “Adjustment of Debts of an Individual with Regular Income” This chapter provides the requirements for an individual to reorganize her debts by proposing a payment plan to her creditors. This Chapter contains the required elements for proposing and confirming a plan (§§1321–1325), as well as the mechanism for administering the plan (§§1326–1330).

The Federal Rules of Bankruptcy Procedure are divided into nine parts, and have specific provisions for, among other things, the types of pleadings and information that must be filed to open a bankruptcy case, the types of notice that must be given to creditors concerning actions taken within the bankruptcy case, specific rules concerning the proposal and balloting of plans of reorganization, procedural mechanisms for implementing the administrative provisions of the Bankruptcy Code, the importation of most of the Federal Rules of Civil Procedure, and the rules for appealing the decision of a bankruptcy court in a contested matter. The Bankruptcy Rules contain a great deal of procedural information that practitioners should consult before taking action in a bankruptcy case.