The Bankruptcy Code

You might feel better informed and more comfortable around bankruptcy if you knew just a little bit about the federal Bankruptcy Code.

Empowered by the U.S. Constitution

The United States Constitution gives Congress the power “to establish… uniform laws on the subject of bankruptcies throughout the United States.” (Article 1, Section 8, Clause 4.) That’s all it says about it.

Congress hasn’t done so well in writing those laws.

For the first century or so after the Constitution was adopted there was no federal bankruptcy law on the books most of the time. There was so much disagreement about some of the most basic principles that bankruptcy laws couldn’t make it through Congress. There was gridlock between creditor-leaning regions and debtor-leaning ones—financial centers like New York, Boston, and Philadelphia vs. much of the rest of the country mostly populated by small farmers and merchants.

Finally, in 1898 the first “permanent” bankruptcy law was passed, and we’ve had one ever since then. The current one, the Bankruptcy Code, was enacted in 1978. It’s been amended many times in the 39 years since then, most recently in a significant way in 2005.

Title 11 is the Bankruptcy Code

Most of bankruptcy law is contained in Title 11 of the United States Code. That is what is referred to as the Bankruptcy Code.

The Bankruptcy Code is divided into various Chapters. Some of those Chapters are about bankruptcy in general. The others provide specific bankruptcy options. That’s where the familiar “Chapter 7” and “Chapter 13” terms come from. A bankruptcy case is referred to by the chapter under which it is filed, as in a “Chapter 7” case.

Each of the Bankruptcy Code’s Chapters is broken down into a number of “Sections.” Each Section is on a different legal topic. For example, Section 521 is about “Debtor’s duties.”

The More Important Parts of the Bankruptcy Code

The Chapters that provide the main bankruptcy options for consumers and small business owners are:

Chapter 7: “Liquidation,” the most common consumer alternative; “straight bankruptcy”
Chapter 11: “Reorganization,” primarily used by businesses or people with businesses
Chapter 12: “Adjustment of Debts of a Family Farmer,” similar to Chapter 13, but for farmers, ranchers, fishermen
Chapter 13: “Adjustment of Debts of an Individual,” the 3-to-5 year partial payment plan

Here are some of the more important Bankruptcy Code Sections for consumers:

Section 341: The “meeting of creditors”—a meeting with your trustee that you attend, usually less than 10 minutes long; in most cases no creditors attend
Section 362: Automatic stay—stops creditor collections as soon as you file bankruptcy
Section 522: Exemptions—assets protected in bankruptcy—in many states you can pick between these and a state set of exemptions
Section 523: Exceptions to discharge—types of debts that will not or may not be discharged (legally written off) in a bankruptcy case
Section 524: Effect of discharge—including punishments for creditors who violate the discharge
Section 707: The “means test”—to qualify for Chapter 7, among other matters
Section 727: Discharge—the rare circumstances when no discharge of debts is entered in a Chapter 7 case
Section 1322: Contents of plan—what a Chapter 13 plan must do and can do
Section 1325: Confirmation of plan—requirements to get court approval of your plan
Section 1328: Discharge—the Chapter 13 discharge, its requirements and exceptions