Federal Bankruptcy laws

US federal bankruptcy laws are authorized by the United States Constitution. The Constitution gives the power to create laws related to bankruptcy to the United States Congress. Therefore, the laws relating to bankruptcy are US federal bankruptcy laws, not state or local. It is also important to realize that bankruptcy is not a constitutional right, it is a privilege. Thus, US federal bankruptcy laws can be changed by simple majorities in Congress and it is not necessary to amend the Constitution to change the US federal bankruptcy laws.

US federal bankruptcy laws serve an important role in our country’s economy. It is the safety net that encourages risk. Our capitalist economy functions best when people go out and take risks by starting their own businesses. It can be very risky to start a business as statistics show most new businesses fail within one to two years of starting. But, when new businesses succeed, those businesses create jobs, pay taxes, and contribute to the economic growth in the country. Our economic system, therefore, should provide safety nets which encourages risk taking and bankruptcy is the safety net. If the business fails, the owner can eliminate debts and start over by filing bankruptcy.

US federal bankruptcy laws also serve the important role of regulating relationships among creditors. Without US federal bankruptcy laws, creditors would be encouraged to rush to the courthouse to obtain a judgment before any other creditors. Under state law, the first creditor to take action gets first dibs on all the debtor’s assets until paid in full and other creditors would be forced to wait a long period of time before they could enforce their rights against a debtor. US federal bankruptcy laws create a system that evens the playing field and insures fairness to all creditors. If a debtor has assets that could be liquidated to pay creditors, each creditor would share pro rata. Even if there are no assets to be sold, bankruptcy serves a vital role to insure fairness to creditors.

US federal bankruptcy law creates several types of bankruptcy. Chapter 7 and Chapter 13 are the types of bankruptcy most appropriate to individuals and married couples looking to either eliminate debt or reorganize their finances through a payment plan. Chapter 11 is a business reorganization plan. Chapter 12 is a reorganization plan applicable to family farmers. Chapter 9 is a reorganization plan for municipalities and Chapter 15 deals with “cross-border insolvency” of foreign proceedings.

The most common types of bankruptcy, by far, are chapter 7 and chapter 13. Legal Helpers provides bankruptcy services only under chapter 7 or chapter 13 and has restricted its representation to only individual consumers under one of these two chapters.

Chapter 7 is a liquidation bankruptcy that provides that any non-exempt assets of the debtor are sold by the United States Trustee and distributed equally among general unsecured creditors. Chapter 13 bankruptcy is a wage earner reorganization where a debtor proposes a plan to repay all or a portion of creditors based on what he/she can afford and based on his/her assets. These types of bankruptcies allow consumers to get a fresh start so that they can once again become active participants in the country’s economy.

US federal bankruptcy laws are very important components to the country’s economic system because they provide a safety net that encourages risk-taking and they provide a way for consumers who are unable to actively purchase goods and services because of debt to start fresh and become consumers again. The purchase of goods and services allows economic growth by creating jobs, creating tax revenue, and providing for a better standard of living.

Learn more about Bankruptcy court process