Creation of Bankruptcy and the Role of the Trustee

Bankrupt Man

The Creation of Bankruptcy

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.

The Trustee

Much of the bankruptcy process is administrative, however, and is conducted away from the courthouse.

This administrative process is often controlled by the bankruptcy trustee. The bankruptcy trustee is a person appointed to oversee this process.

Bankruptcy processes are often referred to by “Chapter.” Each Chapter refers to the Bankruptcy Code. The most bankruptcy filings are done under Chapter 7, Chapter 11, and Chapter 13 of the Bankruptcy Code. Each Chapter differs and no one Chapter will be best for every person or business.

Chapter 13

The trustee in a Chapter 13 reorganization bankruptcy oversees the repayment process to ensure that the debtor, the one who filed for bankruptcy, is complying with the new obligations under the reorganization.

Chapter 7

In a Chapter 7 bankruptcy, the trustee liquidates the non-exempt assets of the debtors and uses the proceeds of the sale to pay off the creditors of that particular debtor.

Chapter 11

In Chapter 11 bankruptcy filings, the trustee gets together the creditors of the debtor in order to create a workable reorganization plan. During each process, the trustee is essential and powerful. If a debtor or creditor believes a trustee has been unfairly bias or inappropriate with respect to the Bankruptcy Code, the debtor or creditor may appeal the trustee’s decision.

Goals of Bankruptcy

Different types of debtors filing for bankruptcy may have different goals. The goals and type of debtor will determine under which chapter of the Bankruptcy Code the debtor should file a bankruptcy petition.

Chapter 7 Bankruptcy

For instance, under chapter 7 of the Bankruptcy Code an individual or a corporation may seek liquidation of nonexempt assets and discharge of remaining debts.

Chapter 9 Bankruptcy

Under chapter 9 of the Bankruptcy Code a municipality, town, city, village, county, or school district may seek adjustment or reorganization of debts, usually through extension of debt maturities or reduction of principal or interest, or by refinancing.

Chapter 11 Bankruptcy

Under chapter 11 of the Bankruptcy Code a corporation or partnership may seek reorganization to keep the business going and repay creditors over a greater period of time.

Chapter 12 Bankruptcy

Under chapter 12 of the Bankruptcy Code family farmers or fishermen with regular annual income propose a plan to repay all or part of their debts through installments, generally over the course of three to five years.

Chapter 13 Bankruptcy

Under chapter 13 of the Bankruptcy Code, a person with steady income who does not qualify for a chapter 7 bankruptcy may request development of a new plan by which to repay debt over a greater period of time, usually three to five years.

Chapter 15 Bankruptcy

When multiple countries are involved, chapter 15 of the Bankruptcy Code may be used.