Bankruptcy Law Fundamentals
Introduction
Bankruptcy law provides debt relief for individuals and businesses while ensuring creditor fairness and financial stability. It has evolved from punitive measures to a rehabilitative system. The Bankruptcy Code (Title 11 U.S.C.) outlines the legal framework, balancing debtor relief with creditor recovery.
Core Concepts
Debtor: Individual/entity seeking debt relief.
Creditor: Party owed money or services.
Estate: Legal interests in the debtor's property.
Automatic Stay: Halts most collection activities upon filing.
Discharge: Releases the debtor from specific debts.
Structure of the Bankruptcy Code
Chapter 7 (Liquidation):
For individuals/businesses unable to repay debts.
Non-exempt assets are liquidated; unsecured debts discharged.
Eligibility determined by a means test.
Chapter 11 (Reorganization):
Primarily for businesses; allows restructuring of debts while continuing operations.
Requires a reorganization plan, creditor negotiations, and court approval.
Chapter 13 (Repayment Plan):
For individuals with regular income to repay debts over 3-5 years.
Enables debtors to retain assets while repaying creditors through a trustee.
Key Features
Automatic Stay: Halts foreclosures, garnishments, and lawsuits. Limited exceptions apply.
Trustee Role: Manages the estate, liquidates assets, or oversees repayment plans.
Federal Jurisdiction: Bankruptcy cases are handled in specialized federal courts.
Notable Cases
Local Loan Co. v. Hunt: Affirmed the fresh start principle.
Marrama v. Citizens Bank: Limited Chapter 7 to Chapter 13 conversions in bad faith cases.
Ransom v. FIA Card Services: Clarified the means test.
Policy and Criticisms
Strengths: Provides debtor relief and ensures orderly creditor recovery.
Criticisms: Complexity of the means test, limited student loan dischargeability, and system abuse.
Proposed Reforms: Simplifying access and expanding dischargeable debts.
Conclusion
Bankruptcy law balances debtor relief and creditor fairness. Understanding its principles and application ensures effective navigation of the system.
