Mon Sep 01 2014   

Bankruptcy Law Research Guide:
Bankruptcy Basics

What is bankruptcy?

Bankruptcy is a legal process that provides individuals and other entities with debt relief. Congress is empowered by the United States Constitution art. I, § 8, to enact bankruptcy laws. These laws are contained in Title 11 of the United States Code.

The United States Bankruptcy Courts Bankruptcy Basics website states the purpose of U.S. bankruptcy law as follows:

A fundamental goal of the federal bankruptcy laws enacted by Congress is to give debtors a financial "fresh start" from burdensome debts. The Supreme Court made this point about the purpose of the bankruptcy law in a 1934 decision:

[I]t gives to the honest but unfortunate debtor … a new opportunity in life and a clear field for future effort, unhampered by the pressure and discouragement of preexisting debt. Local Loan Co. v. Hunt, 292 U.S. 234, 244 (1934).

What type of bankruptcy relief is available?

Chapter 7

Chapter 7 bankruptcy involves liquidation of a debtor’s assets. The debtor is required to turn over all nonexempt assets to the bankruptcy trustee, who must sell the property and distribute the proceeds to creditors. (In reality, sales of assets seldom occur in Chapter 7 bankruptcy because most debtors who file Chapter 7 have few nonexempt assets.) Finally, the debtor is discharged from all dischargeable debts. Click here for the Chapter 7 Bankruptcy page.

Chapter 13

Chapter 13 allows individual debtors with regular income to reorganize their debts. The debtor is allowed to keep most of his or her property, and must repay creditors through the bankruptcy trustee over a period of time, usually three to five years. Click here for the Chapter 13 Bankruptcy page.


Other types of bankruptcy relief are available for particular entities. Chapter 11 is available for business reorganization, Chapter 12 for family farms, Chapter 9 for municipalities, and Chapter 15 for bankruptcies involving assets, debtors, or creditors in more than one country.

Have there been any recent changes to the bankruptcy laws?

Yes. On April 20, 2005, Public Law 109-8 was enacted. The new law made significant changes to the Bankruptcy Code of 1978. Most provisions of the act took effect on October 17, 2005. See the Bankruptcy Changes page for more information.

Page Updated:  5 November 2008