Bankruptcy Overview

Article I, Section 8, of the United States Constitution authorizes the Congress to
enact "uniform Laws on the subject of Bankruptcies." Under this authority, the US  
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 (generally referred to as the "Bankruptcy Rules")
and local rules of each bankruptcy court.  The Bankruptcy Code and Bankruptcy
Rules (and local rules) sets 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.  At present, there are 90 bankruptcy districts in the United
States of America.

The United States Bankruptcy Judge is a judicial officer of the United States and is
the court official with decision-making power over federal bankruptcy cases. 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 and is mostly 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 specific bankruptcy case.

A debtor's involvement with the bankruptcy judge is usually very limited. Generally,
a 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 hearing to confirm the bankruptcy plan.
Usually, the only formal proceeding at which a debtor must appear is the meeting
of creditors, which is often held at the offices of the US Trustee. This meeting is
sometimes referred to as 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.

There are six (6) basic types of bankruptcy cases provided for under the
Bankruptcy Code. The cases are traditionally given the names of the
chapters that describe them.

Chapter 7 - Liquidation - refers to 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 - 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 (more debts are eliminated) under
Chapter 13 than the discharge under Chapter 7.

Chapter 11 - Reorganization - 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 - 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 - Adjustment of Debts of a Municipality - provides 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.

Chapter 15 - Ancillary and Other Cross-Border Cases -  provides an effective
mechanism for dealing with cases of cross-border insolvency.

The bankruptcy process can be very  complex and relies on legal terms and
concepts such as, "automatic stay," "discharge," "exemptions," and "assume." We
have therefore included a
Glossary of Bankruptcy Terminology which explains, in
very basic terms, most of the legal concepts that apply in cases filed under the
Bankruptcy Code.
Bankruptcy Page 2

Business Bankruptcy