Bankruptcy Law – What Bankruptcy Law Covers

Bankruptcy law covers federal and state rules for discharging debts. Federal law has the highest priority, over state laws.


Individuals can exempt certain property, like their primary homes and necessary personal belongings (the availability of exemptions varies by state). They can also redeem secured property (by paying the creditor what the property is worth now) or reaffirm the debt.

Chapter 7

The chapter of the Bankruptcy Code that provides for liquidation of debtors’ assets and distribution to creditors. Individual debtors who meet certain eligibility requirements may file under Chapter 7.

A bankruptcy process in which a firm’s assets are liquidated without continuing the business as a going concern. A common example involves a company that has fallen on hard times and is worth more as a going concern than it would be if it was closed down and sold off piecemeal to satisfy creditors’ claims.

A meeting at which a debtor is questioned under oath by creditors, examiners or the U.S. trustee about his/her financial affairs. Often, the debtor makes a statement about plans for dealing with creditors’ claims.

A statutory ranking of unsecured claims that determines the order in which they will be paid (if at all) when there is not enough money to pay them in full. Some unsecured claims, such as child support obligations and tax claims, have priority over other unsecured claims. Other unsecured claims, such as debts owed to the case trustee or for prepetition expenses, do not have priority. The bankruptcy court can modify this statutory ranking on a case-by-case basis. The bankruptcy law also allows debtors to exempt certain property from unsecured creditors. This property varies by state and may include the debtor’s residence and “tools of the trade” (e.g., auto tools for a mechanic).

Chapter 13

In Chapter 13, debtors usually keep their property, but must agree to devote a portion of their current income to repay creditors over three or five years. This repayment plan allows for debt reduction and catches up on past due payments on things like car loans or mortgages. In exchange, unsecured creditors are generally discharged at the end of the bankruptcy case.

Prior to filing, a debtor must complete a credit counseling course through a government-approved agency or education provider. The counselor will assess the debtor’s situation and help draft a debt repayment plan to file in court. The debtor must also pay a fee to cover the costs of the course.

A trustee is appointed in Chapter 13 cases to collect and distribute funds from the debtor to creditors, following a plan confirmed by the court. Typically, debtors arrange to have their plan payments automatically deducted from paychecks or other sources of income, increasing the likelihood they will stick with the plan.

The provisions of Chapter 13 have significant differences from those of Chapter 7. For example, the scope of a discharge at the end of Chapter 13 is narrower and may depend on the specifics of the individual’s situation. In addition, certain debts are nondischargeable in Chapter 13.

Chapter 11

The goal of Chapter 11 is to provide a business, such as a corporation or limited liability company, the opportunity to stay in business while restructuring debt. Often, this allows the company to emerge with reduced debt and a profitable outlook. Chapter 13 is a similar option for individual debtors who wish to keep their assets, while paying creditors over time in accordance with a court-approved plan.

While a bankruptcy plan of reorganization is at the heart of a Chapter 11 case, there are other important issues that must be addressed. For example, a debtor in possession may not use, sell or lease property of the estate without the court’s approval (11 U.S.C. SS 363(c). Also, the court has what are called “avoiding” powers that allow it to cancel certain transfers of property or money that took place within a specific period of time prior to filing the bankruptcy petition (see 11 U.S.C. SS 554(a)).

Creditors must be notified of the bankruptcy proceeding and given an opportunity to file a proof of claim. Once a claim is filed, it must be paid or allowed in accordance with the terms of the bankruptcy plan. Moreover, the court cannot confirm a plan unless it is endorsed by holders of at least two-thirds in amount and one-half in number of the impaired classes of claims. This is known as the majority-in-interest requirement.

Adversary Proceedings

An adversary proceeding is a lawsuit that is part of another bankruptcy case. Often, a creditor or trustee will file an adversary proceeding to try and stop specific debts from being discharged in a bankruptcy case. These types of claims are often based on alleged fraud, for example, if there is evidence that the debtor was trying to conceal assets from the court, commit fraud or violated bankruptcy guidelines.

When a creditor or trustee files an adversary proceeding, it must include a complaint with details of the claim that needs to be resolved. The bankruptcy clerk will then create a separate electronic docket for this action, with a unique adversary number that is located beneath the main bankruptcy case number. A summons will also be issued and sent to the defendant in this case. They will then need to respond within a certain time period.

Most of the rules that govern litigation in state and federal courts apply to adversary proceedings. The judge will review the evidence and decide how to resolve this matter. This can be settled, dismissed or even go to trial. There is no jury in bankruptcy court, however, the judge is a Federal Bankruptcy Judge. If a judge converts an adversary proceeding into a contested matter, this will usually save the parties some time and expense.