What is Bankruptcy Code?

Lainie Petersen

Bankruptcy laws vary considerably between countries, and in the United States, bankruptcy laws are codified in Title 11 of the United States code. The United States bankruptcy code offers several different options for addressing insolvency in both businesses and individuals. Most people in the United States who need to file for bankruptcy will do so under Chapter 7 or Chapter 13, though some fishermen and family farmers may be able to file under Chapter 12. Distressed businesses may file for bankruptcy under Chapter 7 or Chapter 11 of the bankruptcy code.

People who file for Chapter 7 bankruptcy must demonstrate their inability to pay their debts.
People who file for Chapter 7 bankruptcy must demonstrate their inability to pay their debts.

Chapter 7 of the bankruptcy code is also known as Chapter 7 liquidation, or straight bankruptcy. In a Chapter 7 bankruptcy, individuals and businesses ask the court for protection against their creditors and the discharge of their debts. According to the U.S. bankruptcy code, the bankruptcy trustee, a private individual who is charged with overseeing and managing bankruptcy cases, must then assess and liquidate any assets owned by the business or person filing for bankruptcy. The funds from the liquidated assets are used to compensate the bankrupt party's creditors, and all other dischargable debts, such as credit card and medical debt, are eliminated by a judge.

In the United States, bankruptcy filings are governed by federal code.
In the United States, bankruptcy filings are governed by federal code.

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Both Chapter 11 and Chapter 13 of the bankruptcy code operate very differently from Chapter 7, as they are repayment plans. Chapter 11 allows businesses and some individuals with very high assets to develop a plan for repaying creditors, while Chapter 13 does the same thing for individuals. In a Chapter 13, individuals are not forced to liquidate their assets as they are in Chapter 7, but must establish a supervised repayment plan that lasts anywhere from three to five years. During the Chapter 13 repayment plan, the debtor must pay all of his disposable income toward his debts and live on a budget mandated by federal bankruptcy code standards. At the end of a Chapter 13 bankruptcy, the judge can discharge any remaining unsecured debt not repaid in the repayment plan.

A key aspect of the United States bankruptcy code is the automatic stay. The automatic stay protects those who have filed for bankruptcy from collection attempts by their creditors. This means that a creditor can no longer contact a debtor about the debt by phone, in person, or by mail. If the creditor has a judgment against the debtor, wage garnishments and bank levies must stop. Once a debt is discharged under the bankruptcy code, the creditor can no longer attempt to collect it. While this provides a fresh start for the debtor, bankruptcies can remain on a debtor's credit report for up to 10 years, which can have a serious impact on the debtor's financial situation during that time.

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