Bankruptcy Laws & Chapters

by Mark J. Markus, Attorney at Law

Bankruptcy law is authorized by the United States Constitution in Article One, Section 8 entitled, "Powers of Congress," which provides that "Congress shall have Power...[t]o establish uniform laws upon the subject of bankruptcies." For the first 110-odd years after the Constitution was enacted, there was federal bankruptcy law for only 15 of those years. Many states had their own bankruptcy laws during that time. In 1898, Congress passed the "Torrey Bill," which formed the modern bankruptcy code which stayed in effect until 1979. In 1979 the "current" bankruptcy code was enacted during President Jimmy Carter's administration, which formed the standard and well known bankruptcy "chapters:" Chapter 7 (straight liquidation), Chapter 9 (for municipalities), Chapter 11 (corporate, partnership, and individual reorganization), and Chapter 13 (individual reorganization).

The overall goal of any bankruptcy is to discharge (i.e. eliminate) debts. Depending on which bankruptcy chapter is filed, this may be done without making any further payments on those debts, and may or may not require one to give up assets as a quid pro quo for receiving a discharge.

The Most Common Bankruptcy Chapter Filings

Which bankruptcy chapter to file can only be determined after a consultation with a qualified bankruptcy attorney, licensed to practice in the state in which your case is being filed (which is usually where you have resided, have your principal assets, or principal place of business for the 91 days prior to the case being filed). A brief summary of the common chapters is taken up below.

Chapter 7: This is the most common and least expensive bankruptcy to file. It is straight liquidation of any non-exempt assets owned by the debtor (the person(s) filing the bankruptcy case). Exemptions are statutory protections for assets, and they vary from state to state. In many cases, one can keep all their assets in a Chapter 7 case. To qualify for a Chapter 7 case, one must pass the so-called "means test" which became required as part of the 2005 amendments to the bankruptcy code. This test takes into account income received in the 6 months prior to filing, and uses IRS allowed standards for necessary living expenses.

Chapter 13: This is exclusively for individuals (both consumers and those running self-employment businesses). To be eligible for Chapter 13 you must have less than $336,900 of "non-contingent, liquidated" unsecured debts and less than $1,010,650 of non-contingent, liquidated secured debts. The purpose is to propose a repayment plan based on ability to pay (determined by the income received in the six months prior to filing less IRS allowed deductions and/or your actual current income and expenses, whichever is higher usually). This can repay anywhere from 0-100% of unsecured debt, and if the plan is completed, anything remaining is discharged. Chapter 13 also allows a host of other options, such as removing liens against property, particularly against property that isn't your principal residence. These options should be discussed with an attorney.

Chapter 11: This is generally for businesses (corporations/partnerships) but also for individuals who don't meet the debt limitations of a Chapter 13 case. Chapter 11 is far more involved and expensive, but can provide a lot of flexibility in dealing with creditors. Creditors get to vote for or against the proposed plan, and the debtor remains in possession of all assets and day-to-day operations of his/her/its affairs and are thus known as a "debtor-in-possession."

Working with Bankruptcy Lawyers & Attorneys

Mark Markus is a Southern California Bankruptcy lawyer offering a full range of bankruptcy law services in Los Angeles, including Chapter 7 bankruptcy and chapter 13 bankruptcy filings.

Find additional information about bankruptcy law, filing bankruptcy and find bankruptcy lawyers.