Bankruptcy helps people and businesses who can no longer pay their debts get relief by liquidating assets to pay their debts or by creating a repayment plan.
Filing a case can help a person or business by discarding debt or making a plan to repay debts. A case normally begins when the debtor files a petition with the court. A petition may be filed by an individual, by spouses together, or by a corporation or other entity.
All cases are handled in federal courts under rules outlined in the U.S. Bankruptcy Code.
There are different types of cases, which are usually referred to by their chapter in the U.S. Bankruptcy Code.
- Individuals may file under Chapter 7 or Chapter 13 depending on the specifics of their situation.
- Municipalities may file under Chapter 9 to reorganize.
- Businesses may file under Chapter 7 to liquidate or Chapter 11 to reorganize.
- Chapter 12 provides debt relief to family farmers and fishermen.
- Filings that involve parties from more than one country are filed under Chapter 15.
Filing personal cases under Chapter 7 or Chapter 13 takes careful preparation and understanding of legal issues. Misunderstandings of the law or making mistakes in the process can affect your rights. Court employees and judges are prohibited by law from offering legal advice.
The U.S. bankruptcy courts, which are units of the district courts, exercise the bankruptcy jurisdiction established by statute and referred to them by their respective district courts. Although the Constitution grants the Congress authority to establish uniform bankruptcy laws, for much of the nation’s history the federal courts did not have any bankruptcy jurisdiction.
In the nineteenth century, three short-lived statutes assigned the federal courts responsibility for the administration of bankruptcy cases. An act of 1800 (2 Stat. 19, repealed in 1803) authorized judges of the district courts to appoint commissioners who would oversee the discharge of debts in each bankruptcy case. In an 1841 act (5 Stat. 440, repealed in 1843), Congress granted the district courts “jurisdiction in all matters and proceedings in bankruptcy” and charged the courts with formulating rules for bankruptcy proceedings. Under the act (14 Stat. 517) that governed federal bankruptcy from 1867 to 1878, Congress for the first time referred to the district courts as “constituted courts of bankruptcy,” with original jurisdiction in all bankruptcy matters. The district courts were to be open at all times for bankruptcy business, and the district judges were authorized to appoint registers to assist in the administration of such cases.
The 1898 bankruptcy act (30 Stat. 544), which was in effect for eighty years, again designated the U.S. district courts to serve as courts of bankruptcy. The act established the position of referee: referees were appointed by district judges to oversee the administration of bankruptcy cases and to exercise certain judicial responsibilities referred by the district court. Subsequent acts expanded the referees’ judicial powers.
By the 1960s, the rise in consumer bankruptcy and congestion in the federal courts led to proposals for reform of the nation’s bankruptcy laws. As part of a broad plan to revise the code, the congressionally chartered Commission on Bankruptcy Laws of the United States recommended the establishment of independent bankruptcy courts within the federal judiciary. The Bankruptcy Reform Act of 1978 (92 Stat. 2657) conferred original jurisdiction on the district courts and established a court in each judicial district to exercise bankruptcy jurisdiction. The act provided that the new courts would be considered adjuncts of the district courts but would be presided over by bankruptcy judges appointed by the president and confirmed by the Senate for fourteen-year terms, beginning in 1984. In the meantime the incumbent referees would serve as bankruptcy judges.
In Northern Pipeline Construction Co. v. Marathon Pipe Line Co. (458 U.S. 50), the Supreme Court in 1982 declared unconstitutional the grant of bankruptcy jurisdiction to independent courts composed of judges who did not have life tenure and the other protections of Article III of the Constitution. In response to the Court’s recommendations that Congress restructure the courts, the Bankruptcy Amendments and Federal Judgeship Act of 1984 (98 Stat. 333) conferred jurisdiction on the district courts and authorized the district courts to refer any or all matters falling within that jurisdiction to the bankruptcy judges for the district. The 1984 act also provided that bankruptcy judges would be appointed by the courts of appeals. Under current practice, district courts automatically refer bankruptcy cases and proceedings to the bankruptcy court. A bankruptcy court is authorized to decide all referred business, except in limited matters known as “non-core” proceedings. If one of the parties does not consent to entry of a judgment by the bankruptcy judge in these proceedings, the bankruptcy court may only hear the matter and submit proposed findings of fact and conclusions of law to the district court. The district judge then enters the final order, which is subject to review by the courts of appeals or bankruptcy appellate panels.