What Is Bankruptcy Law?

Bankruptcy law provides an opportunity for debtors — individuals and businesses — to resolve their outstanding obligations. It establishes procedures for discharging certain debts, repaying others and restructuring the remainder.


Generally, in chapter 7 bankruptcy, a trustee takes over the debtor’s property and liquidates it to pay creditors. Most individual consumer debt is discharged in this proceeding.

Discharge of Debts

During the bankruptcy process, you may be discharged from the personal liability for certain debts. The judge issues the discharge, and the court clerk records it in your case. The creditor can never legally recover a debt that is discharged in bankruptcy.

The court’s order of discharge covers debts that existed as of the date of the filing of the petition, and also any liability that arose from events that took place before the date of the filing of the bankruptcy. However, the court can revoke the discharge in your case if you obtained it fraudulently or committed one of several other acts of impropriety.

Bankruptcy law permits individuals and businesses to reduce or eliminate unsecured debt, and also structure a plan for repayment of nondischargeable debts over time. It can also allow you to keep property with a lien or mortgage, so long as the lender agrees to alter the terms of the loan. The attorneys at Fesenmyer Cousino Weinzimmer can review your individual circumstances and explain all of your options. We have decades of experience in guiding clients through bankruptcy.

Liquidation of Assets

Chapter 7 of the Bankruptcy Code provides for an orderly and court-supervised liquidation process that converts a debtor’s assets into cash for distribution among creditors. However, there are a number of exemptions from this procedure that vary by state.

Exempt property may include household goods, tools of the trade, automobiles and some other items. In addition, a debtor may retain certain wages owed to him or her by his or her employer.

Creditors who hold security interests in a debtor’s property, such as a mortgage on a home or lien on a car, have the right to repossess or foreclose on that property during and after a bankruptcy case. This is known as “secured creditor rights.”

Generally, nonexempt assets are sold to pay creditors’ claims. Unsecured creditors who have filed a proof of claim are entitled to receive a share of the sales proceeds, although some unsecured debts are discharged. The trustee is required to file a report with the court in all cases that contain nonexempt assets. In those cases, the court must notify unsecured creditors to submit a proof of claim within a specified period of time.

Avoidance of Liens

Bankruptcy law enables debtors to get a fresh start by resolving debts through the supervised distribution of assets. In general, most of your property will be sold to pay creditors, but you can protect certain assets through bankruptcy exemptions. Exemption “stacking” is permitted, and exemption rules vary by state.

Liens are a legal claim against your property by a creditor that allows them to recover the unpaid portion of the debt from you if you fail to fulfill the terms of the loan agreement. There are different kinds of liens: voluntary liens, judicial liens, and non-consensual liens.

A judicial lien is created when the court grants a judgment against you. A judicial lien on real property can prevent you from selling or refinancing your home. However, you may be able to avoid a judicial lien in bankruptcy by meeting the requirements of 11 U.S.C. SS 522(f). You must file a motion to avoid the lien and provide certain information about your property, including the extent of the lien. You must also serve the motion on the creditor who holds the lien.

Recovery of Transfers of Property

Bankruptcy law gives trustees and debtors-in-possession the ability to take action against pre-bankruptcy property transfers that could be deemed fraudulent or preferential. These are commonly known as avoidance actions. In general, the trustee can recover property or money that was transferred before bankruptcy if it meets two conditions:

First, it must be an actual preferential transfer. Second, the trustee must have reason to believe that the transfer was made with the intent to defraud creditors or impair their ability to collect on unsecured debts. The trustee can then sue to recover the property or money from the initial or subsequent transferee.

The trustee can also sue to recover a transfer that was avoided under state law and incorporated into the bankruptcy estate. This is usually possible if the trustee can show that state law provides for a longer look back period than the two years allowed under the Bankruptcy Code.

The bankruptcy system allows individuals and businesses to resolve overburdened debts while protecting certain assets. Individuals can seek relief in chapter 7 or chapter 13. Businesses can file for relief under Chapter 11. In both types of proceedings, the trustee may sell some property to repay creditors.

Insider Transactions

Bankruptcy law is a branch of law that deals with situations where people or businesses are unable to pay their debts. It is controlled by a set of federal statutes and litigated in bankruptcy courts. State laws may address other aspects of debtor-creditor relationships.

When a person or business files a voluntary petition for relief under chapter 11 of the Bankruptcy Code, it becomes a “debtor in possession.” Under section 1101, the debtor must file a disclosure statement with the court that lists all of its assets and liabilities and provides other information. The bankruptcy judge then reviews the statement to make sure that it is complete and accurate.

A chapter 11 plan must designate classes of claims and interests that will receive treatment under the reorganization. Generally, the plan will provide for payments to secured creditors, unsecured creditors with priority and general unsecured creditors.

If a creditor objected to the design of a class or to its allocation in the plan, it can institute an adversary proceeding against the debtor. These proceedings can include lien avoidance actions, action to avoid preferences and actions to recover fraudulent transfers.