Bankruptcy in the United States
In the United States, bankruptcy is largely governed by federal law, commonly referred to as the "Bankruptcy Code" ("Code").[1] The United States Constitution (Article 1, Section 8, Clause 4) authorizes Congress to enact "uniform Laws on the subject of Bankruptcies throughout the United States". Congress has exercised this authority several times since 1801, including through adoption of the Bankruptcy Reform Act of 1978, as amended, codified in Title 11 of the United States Code and the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA).
Some laws relevant to bankruptcy are found in other parts of the United States Code. For example, bankruptcy crimes are found in Title 18 of the United States Code (Crimes). Tax implications of bankruptcy are found in Title 26 of the United States Code (Internal Revenue Code), and the creation and jurisdiction of bankruptcy courts are found in Title 28 of the United States Code (Judiciary and Judicial procedure).
Bankruptcy cases are filed in United States bankruptcy court (units[2] of the United States District Courts), and federal law governs procedure in bankruptcy cases. However, state laws are often applied to determine how bankruptcy affects the property rights of debtors. For example, laws governing the validity of liens or rules protecting certain property from creditors (known as exemptions), may derive from state law or federal law. Because state law plays a major role in many bankruptcy cases, it is often unwise to generalize some bankruptcy issues across state lines.
Features of U.S. bankruptcy law[edit]
Voluntary versus involuntary bankruptcy[edit]
As a threshold matter, bankruptcy cases are either voluntary or involuntary. In voluntary bankruptcy cases, which account for the overwhelming majority of cases, debtors petition the bankruptcy court. With involuntary bankruptcy, creditors, rather than the debtor, file the petition in bankruptcy. Involuntary petitions are rare, however, and are occasionally used in business settings to force a company into bankruptcy so that creditors can enforce their rights.
The estate[edit]
Except in Chapter 9 cases, commencement of a bankruptcy case creates an "estate". Generally, the debtor's creditors must look to the assets of the estate for satisfaction of their claims. The estate consists of all property interests of the debtor at the time of case commencement, subject to certain exclusions and exemptions.[11] In the case of a married person in a community property state, the estate may include certain community property interests of the debtor's spouse even if the spouse has not filed bankruptcy.[12] The estate may also include other items, including but not limited to property acquired by will or inheritance within 180 days after case commencement.[13]
For federal income tax purposes, the bankruptcy estate of an individual in a Chapter 7 or 11 case is a separate taxable entity from the debtor.[14] The bankruptcy estate of a corporation, partnership, or other collective entity, or the estate of an individual in Chapters 12 or 13, is not a separate taxable entity from the debtor.[15]
Bankruptcy costs[edit]
In 2013, 91 percent of U.S. individuals filing bankruptcy hire an attorney to file their Chapter 7 petition.[49] The typical cost of an attorney was $1,170.[49] Alternatives to filing with an attorney are: filing pro se, meaning without an attorney, which requires an individual to fill out least sixteen separate forms,[50] hiring a petition preparer,[51] or using online software to generate the petition.
The U.S. Bankruptcy Court also charges fees. The amounts of these fees vary depending on the Chapter of bankruptcy being filed. As of 2016, the filing fee is $335 for Chapter 7 and $310 for Chapter 13.[52] It is possible to apply for an installment payment plan in cases of financial hardship. Additional fees are charged for adding creditors after filing ($31), converting the case from one chapter to another ($10-$45), and reopening the case ($245 for Chapter 7 and $235 in Chapter 13).[53]
Bankruptcy crimes[edit]
In the United States, criminal provisions relating to bankruptcy fraud and other bankruptcy crimes are found in sections 151 through 158 of Title 18 of the United States Code.
Bankruptcy fraud includes filing a bankruptcy petition or any other document in a bankruptcy case for the purpose of attempting to execute or conceal a scheme or artifice to defraud. Bankruptcy fraud also includes making a false or fraudulent representation, claim or promise in connection with a bankruptcy case, either before or after the commencement of the case, for the purpose of attempting to execute or conceal a scheme or artifice to defraud. Bankruptcy fraud is punishable by a fine, or by up to five years in prison, or both.[54]
Knowingly and fraudulently concealing property of the estate from a custodian, trustee, marshal, or other court officer is a separate offense, and may also be punishable by a fine, or by up to five years in prison, or both. The same penalty may be imposed for knowingly and fraudulently concealing, destroying, mutilating, falsifying, or making a false entry in any books, documents, records, papers, or other recorded information relating to the property or financial affairs of the debtor after a case has been filed.[55]
Certain offenses regarding fraud in connection with a bankruptcy case may also be classified as "racketeering activity" for purposes of the Racketeer Influenced and Corrupt Organizations Act (RICO).[56] Any person who receives income directly or indirectly derived from a "pattern" of such racketeering activity (generally, two or more offensive acts within a ten-year period) and who uses or invests any part of that income in the acquisition, establishment, or operation of any enterprise engaged in (or affecting) interstate or foreign commerce may be punished by up to twenty years in prison.[57]
Bankruptcy crimes are prosecuted by the United States Attorney, typically after a reference from the United States Trustee, the case trustee, or a bankruptcy judge.
Bankruptcy fraud can also sometimes lead to criminal prosecution in state courts, under the charge of theft of the goods or services obtained by the debtor for which payment, in whole or in part, was evaded by the fraudulent bankruptcy filing.
Bankruptcy and federalism[edit]
On January 23, 2006, the Supreme Court, in Central Virginia Community College v. Katz, declined to apply state sovereign immunity from Seminole Tribe v. Florida,[58] to defeat a trustee's action under 11 U.S.C. § 547 to recover preferential transfers made by a debtor to a state agency. The Court ruled that Article I, section 8, clause 4 of the U.S. Constitution (empowering Congress to establish uniform laws on the subject of bankruptcy) abrogates the state's sovereign immunity in suits to recover preferential payments.