In 1978, exercising its Constitutional authority, Congress enacted the Bankruptcy Code. Lawmakers subsequently have amended the Code several times—most notably in 2005 when Congress enacted the “Bankruptcy Abuse Prevention and Consumer Protection Act.” The Supreme Court promulgated the Bankruptcy Rules that govern procedures and litigation in Federal Bankruptcy Courts. Although the states establish property laws and regulate relationships between creditors and debtors, all bankruptcy proceedings fall under the Federal Courts’ jurisdiction, and each judicial district in the Federal Court System has its own bankruptcy court. Ninety Federal Bankruptcy Courts currently resolve cases in compliance with Title 11 of the United States Code.
The philosophic heart of bankruptcy court proceedings
The latest amendments to the Bankruptcy Code impose stringent restrictions on bankruptcy filings, but they remain consistent with Congress’s original intent. Passing the bankruptcy laws, Congress intended that the bankruptcy courts should grant fundamentally honest debtors a “fresh start,” relieving them of burdensome debts. Lawmakers understood and developed the legislation under a rubric from the Supreme Court’s ruling in Local Loan v. Hunt (292U.S.234,244). The Court heard the Hunt case in 1934 at the height of the Great Depression, but it has not wavered in the seventy-five years since its landmark decision. In the Hunt case, the Court held that bankruptcy “gives to the honest but unfortunate debtor…a new opportunity in life and a clear field for future effort, unhampered by the pressure and discouragement of pre-existing debt.”
Basics of the Bankruptcy Code
In general, the Bankruptcy Code grants debtors relief of personal liability for insurmountable debts, prohibiting creditors from taking action against them once bankruptcy proceedings have concluded. The different chapters in the Bankruptcy Code specify different resolutions for different circumstances.
Chapter 7, the rules of “liquidation,” authorize the bankruptcy court to appoint a trustee, who collects all of a debtor’s significant assets. The bankruptcy trustee sells the assets and divides the proceeds equitably among the creditors. Given current economic conditions, the majority of people filing for Chapter 7 relief have no disposable assets, and they petition the court to cancel their debts on grounds of their insolvency. In Chapter 7 cases, the bankruptcy courts have instituted a “means test”—a formula for determining whether or not a debtor has sufficient regular income to meet some of his or her obligations. Failure to pass the means test does not disqualify a person from filing for bankruptcy, but it changes the rules and standards under which he or she is eligible to file.
The second most common kind of bankruptcy proceeding, a filing under Chapter 13 provides for a debtor’s “rehabilitation,” allowing him or her to pay-off current obligations with future earnings. Debtors with some assets and sufficient income to satisfy their creditors’ demands typically petition to keep their homes and automobiles. In return for the court’s protection and a grant of more time, Chapter 13 petitioners agree to comply with a court-approved plan for settling their debts. Chapter 11 affords similar protection and rehabilitation for small businesses, and Chapter 12 protects family farmers and fishermen with regular incomes.
Powers of the Bankruptcy Court Judge
Most petitioners under Chapters 7 and 13 never appear in court and never see or speak with the judge presiding over their cases. Although the bankruptcy courts cannot demand that attorneys represent all petitioners for bankruptcy, very few people file their cases in pro per. Experienced bankruptcy attorneys sternly caution that bankruptcy court is not an appropriate setting for ordinary citizens’ re-enactment of their favorite “Law and Order” episodes. The bankruptcy judge has discretion over every matter in every case, but the majority of the judge’s work is administrative and conducted in consultation with bankruptcy trustees and attorneys.
