Bankruptcy

BASICS

(Applicable to Cases Filed on or After October 17, 2005)

Leonidas Ralph Mecham, Director

Administrative Office

of the United States Courts
Bankruptcy

BASICS

(Applicable to Cases Filed on or After October 17, 2005)

Bankruptcy Judges Division

Administrative Office

of the United States Courts

APRIL 2006

Revised Third Edition

While the information presented is accurate as of the date of publication, it should not be cited

or relied upon as legal authority. It should not be used as a substitute for reference to the

United States Bankruptcy Code (title 11, United States Code) and the Federal Rules of

Bankruptcy Procedure, both of which may be reviewed at local law libraries, or to local rules of

practice adopted by each bankruptcy court. Finally, this publication should not substitute for

the advice of competent legal counsel.
Table of

CONTENTS

Introduction 6

The Discharge in Bankruptcy 10

Chapter 7. Liquidation Under the Bankruptcy Code 15

Chapter 13. Individual Debt Adjustment 23

Chapter 11. Reorganization Under the Bankruptcy Code 30

Chapter 12. Family Farmer or Family Fisherman Bankruptcy 44

Chapter 9. Municipality Bankruptcy 51

Chapter 15. Ancillary and Other Cross-Border Cases 59

SCRA. Servicemembers’ Civil Relief Act 62

SIPA. Securities Investor Protection Act 66

Bankruptcy Terminology 73
Bankruptcy Basics

A Publication of

the Bankruptcy Judges Division

Bankruptcy Basics is designed to provide

basic information to debtors, creditors, court

personnel, the media, and the general public

on different aspects of the federal bankruptcy

laws. It also provides individuals who may

be considering bankruptcy with a basic

explanation of the different chapters under

which a bankruptcy case may be filed and to

answer some of the most commonly asked

questions about the bankruptcy process.

Bankruptcy Basics provides general

information only. While every effort has been

made to ensure that the information contained

in it is accurate as of the date of publication, it

is not a full and authoritative statement of the

law on any particular topic. The information

presented in this publication should not be

cited or relied upon as legal authority and

should not be used as a substitute for

reference to the United States Bankruptcy

Code (title 11, United States Code) and the

Federal Rules of Bankruptcy Procedure.

Most importantly, Bankruptcy Basics should

not substitute for the advice of competent

legal counsel or a financial expert. Neither the

Bankruptcy Judges Division nor the

Administrative Office of the United States

Courts can provide legal or financial advice.

Such advice may be obtained from a

competent attorney, accountant, or financial

adviser.

The Process

Article I, Section 8, of the United States

Constitution authorizes Congress to enact

“uniform Laws on the subject of

Bankruptcies.” Under this grant of authority,

Congress enacted the “Bankruptcy Code” in

1978. The Bankruptcy Code, which is

codified as title 11 of the United States Code,

has been amended several times since its

enactment. It is the uniform federal law that

governs all bankruptcy cases.

The procedural aspects of the bankruptcy

process are governed by the Federal Rules of

Bankruptcy Procedure (often called the

“Bankruptcy Rules”) and local rules of each

bankruptcy court. The Bankruptcy Rules

contain a set of official forms for use in

bankruptcy cases. The Bankruptcy Code and

Bankruptcy Rules (and local rules) set forth

the formal legal procedures for dealing with

the debt problems of individuals and

businesses. 

There is a bankruptcy court for each judicial

district in the country. Each state has one or

more districts. There are 90 bankruptcy

districts across the country. The bankruptcy

courts generally have their own clerk’s

offices.

The court official with decision-making

power over federal bankruptcy cases is the

United States bankruptcy judge, a judicial

officer of the United States district court. The

bankruptcy judge may decide any matter

connected with a bankruptcy case, such as
7

eligibility to file or whether a debtor should

receive a discharge of debts. Much of the

bankruptcy process is administrative,

however, and is conducted away from the

courthouse. In cases under chapters 7, 12, or

13, and sometimes in chapter 11 cases, this

administrative process is carried out by a

trustee who is appointed to oversee the case.

A debtor’s involvement with the bankruptcy

judge is usually very limited. A typical

chapter 7 debtor will not appear in court and

will not see the bankruptcy judge unless an

objection is raised in the case. A chapter 13

debtor may only have to appear before the

bankruptcy judge at a plan confirmation

hearing. Usually, the only formal proceeding

at which a debtor must appear is the meeting

of creditors, which is usually held at the

offices of the U.S. trustee. This meeting is

informally called a “341 meeting” because

section 341 of the Bankruptcy Code requires

that the debtor attend this meeting so that

creditors can question the debtor about debts

and property.

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). This goal is accomplished through the

bankruptcy discharge, which releases debtors

from personal liability from specific debts and

prohibits creditors from ever taking any action

against the debtor to collect those debts. This

publication describes the bankruptcy

discharge in a question and answer format,

discussing the timing of the discharge, the

scope of the discharge (what debts are

discharged and what debts are not

discharged), objections to discharge, and

revocation of the discharge. It also describes

what a debtor can do if a creditor attempts to

collect a discharged debt after the bankruptcy

case is concluded. 

Six basic types of bankruptcy cases are

provided for under the Bankruptcy Code, each

of which is discussed in this publication. The

cases are traditionally given the names of the

chapters that describe them.

Chapter 7, entitled Liquidation, contemplates

an orderly, court-supervised procedure by

which a trustee takes over the assets of the

debtor’s estate, reduces them to cash, and

makes distributions to creditors, subject to the

debtor’s right to retain certain exempt

property and the rights of secured creditors.

Because there is usually little or no

nonexempt property in most chapter 7 cases,

there may not be an actual liquidation of the

debtor’s assets. These cases are called

“no-asset cases.” A creditor holding an

unsecured claim will get a distribution from

the bankruptcy estate only if the case is an

asset case and the creditor files a proof of

claim with the bankruptcy court. In most

chapter 7 cases, if the debtor is an individual,

he or she receives a discharge that releases

him or her from personal liability for certain

dischargeable debts. The debtor normally

receives a discharge just a few months after

the petition is filed. Amendments to the

Bankruptcy Code enacted in to the

Bankruptcy Abuse Prevention and Consumer
8

Protection Act of 2005 require the application

of a “means test” to determine whether

individual consumer debtors qualify for relief

under chapter 7. If such a debtor’s income is

in excess of certain thresholds, the debtor may

not be eligible for chapter 7 relief.

Chapter 13, entitled Adjustment of Debts of

an Individual With Regular Income, is

designed for an individual debtor who has a

regular source of income. Chapter 13 is often

preferable to chapter 7 because it enables the

debtor to keep a valuable asset, such as a

house, and because it allows the debtor to

propose a “plan” to repay creditors over time

– usually three to five years. Chapter 13 is

also used by consumer debtors who do not

qualify for chapter 7 relief under the means

test. At a confirmation hearing, the court

either approves or disapproves the debtor’s

repayment plan, depending on whether it

meets the Bankruptcy Code’s requirements for

confirmation. Chapter 13 is very different

from chapter 7 since the chapter 13 debtor

usually remains in possession of the property

of the estate and makes payments to creditors,

through the trustee, based on the debtor’s

anticipated income over the life of the plan.

Unlike chapter 7, the debtor does not receive

an immediate discharge of debts. The debtor

must complete the payments required under

the plan before the discharge is received. The

debtor is protected from lawsuits,

garnishments, and other creditor actions while

the plan is in effect. The discharge is also

somewhat broader (i.e., more debts are

eliminated) under chapter 13 than the

discharge under chapter 7. 

Chapter 11, entitled Reorganization,

ordinarily is used by commercial enterprises

that desire to continue operating a business

and repay creditors concurrently through a

court-approved plan of reorganization. The

chapter 11 debtor usually has the exclusive

right to file a plan of reorganization for the

first 120 days after it files the case and must

provide creditors with a disclosure statement

containing information adequate to enable

creditors to evaluate the plan. The court

ultimately approves (confirms) or disapproves

the plan of reorganization. Under the

confirmed plan, the debtor can reduce its

debts by repaying a portion of its obligations

and discharging others. The debtor can also

terminate burdensome contracts and leases,

recover assets, and rescale its operations in

order to return to profitability. Under chapter

11, the debtor normally goes through a period

of consolidation and emerges with a reduced

debt load and a reorganized business.

Chapter 12, entitled Adjustment of Debts of a

Family Farmer or Fisherman with Regular

Annual Income, provides debt relief to family

farmers and fishermen with regular income.

The process under chapter 12 is very similar

to that of chapter 13, under which the debtor

proposes a plan to repay debts over a period

of time – no more than three years unless the

court approves a longer period, not exceeding

five years. There is also a trustee in every

chapter 12 case whose duties are very similar

to those of a chapter 13 trustee. The chapter

12 trustee’s disbursement of payments to

creditors under a confirmed plan parallels the

procedure under chapter 13. Chapter 12

allows a family farmer or fisherman to

continue to operate the business while the

plan is being carried out. 

Chapter 9, entitled Adjustment of Debts of a

Municipality, provides essentially for

reorganization, much like a reorganization

under chapter 11. Only a “municipality” may

file under chapter 9, which includes cities and
9

towns, as well as villages, counties, taxing

districts, municipal utilities, and school

districts.

The purpose of Chapter 15, entitled Ancillary

and Other Cross-Border Cases, is to provide

an effective mechanism for dealing with cases

of cross-border insolvency. This publication

discusses the applicability of Chapter 15

where a debtor or its property is subject to the

laws of the United States and one or more

foreign countries.

In addition to the basic types of bankruptcy

cases, Bankruptcy Basics provides an

overview of the Servicemembers’ Civil Relief

Act, which, among other things, provides

protection to members of the military against

the entry of default judgments and gives the

court the ability to stay proceedings against

military debtors. 

This publication also contains a description of

liquidation proceedings under the Securities

Investor Protection Act (“SIPA”). Although

the Bankruptcy Code provides for a

stockbroker liquidation proceeding, it is far

more likely that a failing brokerage firm will

find itself involved in a SIPA proceeding. The

purpose of SIPA is to return to investors

securities and cash left with failed brokerages.

Since being established by Congress in 1970,

the Securities Investor Protection Corporation

has protected investors who deposit stocks

and bonds with brokerage firms by ensuring

that every customer’s property is protected, up

to $500,000 per customer.

The bankruptcy process is complex and relies

on legal concepts like the “automatic stay,”

“discharge,” “exemptions,” and “assume.”

Therefore, the final chapter of this publication

 is a glossary of Bankruptcy Terminology

which explains, in layman’s terms, most of the

legal concepts that apply in cases filed under

the Bankruptcy Code.
10

The Discharge in

Bankruptcy 

The bankruptcy discharge varies depending

on the type of case a debtor files: chapter 7,

11, 12, or 13. Bankruptcy Basics attempts to

answer some basic questions about the

discharge available to individual debtors

under all four chapters including:

1. What is a discharge in bankruptcy?

2. When does the discharge occur?

3. How does the debtor get a discharge?

4. Are all the debtor’s debts discharged or

only some?

5. Does the debtor have a right to a discharge

or can creditors object to the discharge?

6. Can the debtor receive a second discharge

in a later case?

7. Can the discharge be revoked?

8. May the debtor pay a discharged debt after

the bankruptcy case has been concluded?

9. What can the debtor do if a creditor

attempts to collect a discharged debt after the

case is concluded?

10. May an employer terminate a debtor’s

employment solely because the person was a

debtor or failed to repay a discharged debt?

WHAT IS A DISCHARGE IN

 BANKRUPTCY?

A bankruptcy discharge releases the debtor

from personal liability for certain specified

types of debts. In other words, the debtor is no

longer legally required to pay any debts that

are discharged. The discharge is a permanent

order prohibiting the creditors of the debtor

from taking any form of collection action on

discharged debts, including legal action and

communications with the debtor, such as

telephone calls, letters, and personal contacts.

Although a debtor is not personally liable for

discharged debts, a valid lien (i.e., a charge

upon specific property to secure payment of a

debt) that has not been avoided (i.e., made

unenforceable) in the bankruptcy case will

remain after the bankruptcy case. Therefore,

a secured creditor may enforce the lien to

recover the property secured by the lien.

WHEN DOES THE DISCHARGE

OCCUR?

The timing of the discharge varies, depending

on the chapter under which the case is filed. In

a chapter 7 (liquidation) case, for example, the

court usually grants the discharge promptly on

expiration of the time fixed for filing a

complaint objecting to discharge and the time

fixed for filing a motion to dismiss the case

for substantial abuse (60 days following the

first date set for the 341 meeting). Typically,

this occurs about four months after the date

the debtor files the petition with the clerk of

the bankruptcy court. In individual chapter 11

cases, and in cases under chapter 12

(adjustment of debts of a family farmer or

fisherman) and 13 (adjustment of debts of an

individual with regular income), the court

generally grants the discharge as soon as
11

practicable after the debtor completes all

payments under the plan. Since a chapter 12

or chapter 13 plan may provide for payments

to be made over three to five years, the

discharge typically occurs about four years

after the date of filing. The court may deny an

individual debtor’s discharge in a chapter 7 or

13 case if the debtor fails to complete “an

instructional course concerning financial

management.” The Bankruptcy Code provides

limited exceptions to the “financial

management” requirement if the U.S. trustee

or bankruptcy administrator determines there

are inadequate educational programs

available, or if the debtor is disabled or

incapacitated or on active military duty in a

combat zone.

HOW DOES THE DEBTOR GET A

DISCHARGE? 

Unless there is litigation involving objections

to the discharge, the debtor will usually

automatically receive a discharge. The Federal

Rules of Bankruptcy Procedure provide for

the clerk of the bankruptcy court to mail a

copy of the order of discharge to all creditors,

the U.S. trustee, the trustee in the case, and

the trustee’s attorney, if any. The debtor and

the debtor’s attorney also receive copies of the

discharge order. The notice, which is simply

a copy of the final order of discharge, is not

specific as to those debts determined by the

court to be non-dischargeable, i.e., not

covered by the discharge. The notice informs

creditors generally that the debts owed to

them have been discharged and that they

should not attempt any further collection.

They are cautioned in the notice that

continuing collection efforts could subject

them to punishment for contempt. Any

inadvertent failure on the part of the clerk to

send the debtor or any creditor a copy of the

discharge order promptly within the time

required by the rules does not affect the

validity of the order granting the discharge.

ARE ALL OF THE DEBTOR’S DEBTS

DISCHARGED OR ONLY SOME?

Not all debts are discharged. The debts

discharged vary under each chapter of the

Bankruptcy Code. Section 523(a) of the Code

specifically excepts various categories of

debts from the discharge granted to individual

debtors. Therefore, the debtor must still repay

those debts after bankruptcy. Congress has

determined that these types of debts are not

dischargeable for public policy reasons (based

either on the nature of the debt or the fact that

the debts were incurred due to improper

behavior of the debtor, such as the debtor’s

drunken driving).

There are 19 categories of debt excepted from

discharge under chapters 7, 11, and 12. A

more limited list of exceptions applies to

cases under chapter 13. 

Generally speaking, the exceptions to

discharge apply automatically if the language

prescribed by section 523(a) applies. The

most common types of nondischargeable

debts are certain types of tax claims, debts not

set forth by the debtor on the lists and

schedules the debtor must file with the court,

debts for spousal or child support or alimony,

debts for willful and malicious injuries to

person or property, debts to governmental

units for fines and penalties, debts for most

government funded or guaranteed educational

loans or benefit overpayments, debts for

personal injury caused by the debtor’s

operation of a motor vehicle while

intoxicated, debts owed to certain taxadvantaged retirement plans, and debts for
12

certain condominium or cooperative housing

fees. 

The types of debts described in sections

523(a)(2), (4) and(6) (obligations affected by

fraud or maliciousness) are not automatically

excepted from discharge. Creditors must ask

the court to determine that these debts are

excepted from discharge. In the absence of an

affirmative request by the creditor and the

granting of the request by the court, the types

of debts set out in sections 523(a)(2), (4) and

(6) will be discharged. 

A slightly broader discharge of debts is

available to a debtor in a chapter 13 case than

in a chapter 7 case. Debts dischargeable in a

chapter 13, but not in chapter 7, include debts

for willful and malicious injury to property,

debts incurred to pay non-dischargeable tax

obligations, and debts arising from property

settlements in divorce or separation

proceedings. Although a chapter 13 debtor

generally receives a discharge only after

completing all payments required by the

court-approved (i.e., “confirmed”) repayment

plan, there are some limited circumstances

under which the debtor may request the court

to grant a “hardship discharge” even though

the debtor has failed to complete plan

payments. Such a discharge is available only

to a debtor whose failure to complete plan

payments is due to circumstances beyond the

debtor’s control. The scope of a chapter 13

“hardship discharge” is similar to that in a

chapter 7 case with regard to the types of

debts that are excepted from the discharge. A

hardship discharge also is available in chapter

12 if the failure to complete plan payments is

due to “circumstances for which the debtor

should not justly be held accountable.”

DOES THE DEBTOR HAVE THE RIGHT

TO A DISCHARGE OR CAN

CREDITORS OBJECT TO THE

DISCHARGE?

In chapter 7 cases, the debtor does not have an

absolute right to a discharge. An objection to

the debtor’s discharge may be filed by a

creditor, by the trustee in the case, or by the

U.S. trustee. Creditors receive a notice shortly

after the case is filed that sets forth much

important information, including the deadline

for objecting to the discharge. To object to the

debtor’s discharge, a creditor must file a

complaint in the bankruptcy court before the

deadline set out in the notice. Filing a

complaint starts a lawsuit referred to in

bankruptcy as an “adversary proceeding.” 

The court may deny a chapter 7 discharge for

any of the reasons described in section 727(a)

of the Bankruptcy Code, including failure to

provide requested tax documents; failure to

complete a course on personal financial

management; transfer or concealment of

property with intent to hinder, delay, or

defraud creditors; destruction or concealment

of books or records; perjury and other

fraudulent acts; failure to account for the loss

of assets; violation of a court order or an

earlier discharge in an earlier case

commenced within certain time frames

(discussed below) before the date the petition

was filed. If the issue of the debtor’s right to

a discharge goes to trial, the objecting party

has the burden of proving all the facts

essential to the objection.

In chapter 12 and chapter 13 cases, the debtor

is usually entitled to a discharge upon

completion of all payments under the plan. As

in chapter 7, however, discharge may not

occur in chapter 13 if the debtor fails to
13

complete a required course on personal

financial management. A debtor is also

ineligible for a discharge in chapter 13 if he or

she received a prior discharge in another case

commenced within time frames discussed the

next paragraph. Unlike chapter 7, creditors do

not have standing to object to the discharge of

a chapter 12 or chapter 13 debtor. Creditors

can object to confirmation of the repayment

plan, but cannot object to the discharge if the

debtor has completed making plan payments.

CAN A DEBTOR RECEIVE A SECOND

DISCHARGE IN A LATER CHAPTER 7

CASE?

The court will deny a discharge in a later

chapter 7 case if the debtor received a

discharge under chapter 7 or chapter 11 in a

case filed within eight years before the second

petition is filed. The court will also deny a

chapter 7 discharge if the debtor previously

received a discharge in a chapter 12 or chapter

13 case filed within six years before the date

of the filing of the second case unless (1) the

debtor paid all “allowed unsecured” claims in

the earlier case in full, or (2) the debtor made

payments under the plan in the earlier case

totaling at least 70 percent of the allowed

unsecured claims and the debtor’s plan was

proposed in good faith and the payments

represented the debtor’s best effort. A debtor

is ineligible for discharge under chapter 13 if

he or she received a prior discharge in a

chapter 7, 11, or 12 case filed four years

before the current case or in a chapter 13 case

filed two years before the current case.

CAN THE DISCHARGE BE REVOKED?

The court may revoke a discharge under

certain circumstances. For example, a trustee,

creditor, or the U.S. trustee may request that

the court revoke the debtor’s discharge in a

chapter 7 case based on allegations that the

debtor: obtained the discharge fraudulently;

failed to disclose the fact that he or she

acquired or became entitled to acquire

property that would constitute property of the

bankruptcy estate; committed one of several

acts of impropriety described in section

727(a)(6) of the Bankruptcy Code; or failed to

explain any misstatements discovered in an

audit of the case or fails to provide documents

or information requested in an audit of the

case. Typically, a request to revoke the

debtor’s discharge must be filed within one

year of the discharge or, in some cases, before

the date that the case is closed. The court will

decide whether such allegations are true and,

if so, whether to revoke the discharge.

In a chapter 11, 12 and 13 cases, if

confirmation of a plan or the discharge is

obtained through fraud, the court can revoke

the order of confirmation or discharge. 

MAY THE DEBTOR PAY A

DISCHARGED DEBT AFTER THE

BANKRUPTCY CASE HAS BEEN

CONCLUDED?

A debtor who has received a discharge may

voluntarily repay any discharged debt. A

debtor may repay a discharged debt even

though it can no longer be legally enforced.

Sometimes a debtor agrees to repay a debt

because it is owed to a family member or

because it represents an obligation to an

individual for whom the debtor’s reputation is

important, such as a family doctor. 
14

WHAT CAN THE DEBTOR DO IF A

CREDITOR ATTEMPTS TO COLLECT

A DISCHARGED DEBT AFTER THE

CASE IS CONCLUDED?

If a creditor attempts collection efforts on a

discharged debt, the debtor can file a motion

with the court, reporting the action and asking

that the case be reopened to address the

matter. The bankruptcy court will often do so

to ensure that the discharge is not violated.

The discharge constitutes a permanent

statutory injunction prohibiting creditors from

taking any action, including the filing of a

lawsuit, designed to collect a discharged debt.

A creditor can be sanctioned by the court for

violating the discharge injunction. The normal

sanction for violating the discharge injunction

is civil contempt, which is often punishable by

a fine.

CAN AN EMPLOYER TERMINATE A

DEBTOR’S EMPLOYMENT SOLELY

BECAUSE THE PERSON WAS A

DEBTOR OR FAILED TO PAY A

DISCHARGED DEBT?

The law provides express prohibitions against

discriminatory treatment of debtors by both

governmental units and private employers. A

governmental unit or private employer may

not discriminate against a person solely

because the person was a debtor, was

insolvent before or during the case, or has not

paid a debt that was discharged in the case.

The law prohibits the following forms of

governmental discrimination: terminating an

employee; discriminating with respect to

hiring; or denying, revoking, suspending, or

declining to renew a license, franchise, or

similar privilege. A private employer may not

discriminate with respect to employment if the

discrimination is based solely upon the

bankruptcy filing.
15

Chapter 7

Liquidation Under the Bankruptcy

Code

ALTERNATIVES TO CHAPTER 7

Debtors should be aware that there are several

alternatives to chapter 7 relief. For example,

debtors who are engaged in business,

including corporations, partnerships, and sole

proprietorships, may prefer to remain in

business and avoid liquidation. Such debtors

should consider filing a petition under chapter

11 of the Bankruptcy Code. Under chapter 11,

the debtor may seek an adjustment of debts,

either by reducing the debt or by extending

the time for repayment, or may seek a more

comprehensive reorganization. Sole

proprietorships may also be eligible for relief

under chapter 13 of the Bankruptcy Code. 

In addition, individual debtors who have

regular income may seek an adjustment of

debts under chapter 13 of the Bankruptcy

Code. A particular advantage of chapter 13 is

that it provides individual debtors with an

opportunity to save their homes from

foreclosure by allowing them to “catch up”

past due payments through a payment plan.

Moreover, the court may dismiss a chapter 7

case filed by an individual whose debts are

primarily consumer rather than business debts

if the court finds that the granting of relief

would be an abuse of chapter 7. 11 U.S.C. 

§ 707(b). 

If the debtor’s “current monthly income”1

 is

more than the state median, the Bankruptcy

Code requires application of a “means test” to

determine whether the chapter 7 filing is

presumptively abusive. Abuse is presumed if

the debtor’s aggregate current monthly

income over 5 years, net of certain statutorily

allowed expenses, is more than (i) $10,000, or

(ii) 25% of the debtor’s nonpriority unsecured

debt, as long as that amount is at least

$6,000.2 The debtor may rebut a presumption

of abuse only by a showing of special

circumstances that justify additional expenses

or adjustments of current monthly income.

Unless the debtor overcomes the presumption

of abuse, the case will generally be converted

to chapter 13 (with the debtor’s consent) or

will be dismissed. 11 U.S.C. § 707(b)(1). 

Debtors should also be aware that out-of-court

agreements with creditors or debt counseling

services may provide an alternative to a

bankruptcy filing.

BACKGROUND

A chapter 7 bankruptcy case does not involve

the filing of a plan of repayment as in chapter

13. Instead, the bankruptcy trustee gathers and

sells the debtor’s nonexempt assets and uses

the proceeds of such assets to pay holders of

claims (creditors) in accordance with the

provisions of the Bankruptcy Code. Part of the

debtor’s property may be subject to liens and

mortgages that pledge the property to other

creditors. In addition, the Bankruptcy Code

will allow the debtor to keep certain “exempt”

property; but a trustee will liquidate the

debtor’s remaining assets. Accordingly,

potential debtors should realize that the filing

of a petition under chapter 7 may result in the

loss of property. 

CHAPTER 7 ELIGIBILITY

To qualify for relief under chapter 7 of the

Bankruptcy Code, the debtor may be an
16

individual, a partnership, or a corporation or

other business entity. 11 U.S.C. 

§§ 101(41), 109(b). Subject to the means test

described above for individual debtors, relief

is available under chapter 7 irrespective of the

amount of the debtor’s debts or whether the

debtor is solvent or insolvent. An individual

cannot file under chapter 7 or any other

chapter, however, if during the preceding 180

days a prior bankruptcy petition was

dismissed due to the debtor’s willful failure to

appear before the court or comply with orders

of the court, or the debtor voluntarily

dismissed the previous case after creditors

sought relief from the bankruptcy court to

recover property upon which they hold liens.

11 U.S.C. §§ 109(g), 362(d) and (e). In

addition, no individual may be a debtor under

chapter 7 or any chapter of the Bankruptcy

Code unless he or she has, within 180 days

before filing, received credit counseling from

an approved credit counseling agency either in

an individual or group briefing. 11 U.S.C. §§

109, 111. There are exceptions in emergency

situations or where the U.S. trustee (or

bankruptcy administrator) has determined that

there are insufficient approved agencies to

provide the required counseling. If a debt

management plan is developed during

required credit counseling, it must be filed

with the court.

One of the primary purposes of bankruptcy is

to discharge certain debts to give an honest

individual debtor a “fresh start.” The debtor

has no liability for discharged debts. In a

chapter 7 case, however, a discharge is only

available to individual debtors, not to

partnerships or corporations. 11 U.S.C.

§ 727(a)(1). Although an individual chapter 7

case usually results in a discharge of debts,

the right to a discharge is not absolute, and

some types of debts are not discharged.

Moreover, a bankruptcy discharge does not

extinguish a lien on property.

HOW CHAPTER 7 WORKS

A chapter 7 case begins with the debtor filing

a petition with the bankruptcy court serving

the area where the individual lives or where

the business debtor is organized or has its

principal place of business or principal assets.3

In addition to the petition, the debtor must

also file with the court: (1) schedules of assets

and liabilities; (2) a schedule of current

income and expenditures; (3) a statement of

financial affairs; and (4) a schedule of

executory contracts and unexpired leases. Fed.

R. Bankr. P. 1007(b). Debtors must also

provide the assigned case trustee with a copy

of the tax return or transcripts for the most

recent tax year as well as tax returns filed

during the case (including tax returns for prior

years that had not been filed when the case

began). 11 U.S.C. § 521. Individual debtors

with primarily consumer debts have additional

document filing requirements. They must file:

a certificate of credit counseling and a copy of

any debt repayment plan developed through

credit counseling; evidence of payment from

employers, if any, received 60 days before

filing; a statement of monthly net income and

any anticipated increase in income or

expenses after filing; and a record of any

interest the debtor has in federal or state

qualified education or tuition accounts. Id. A

husband and wife may file a joint petition or

individual petitions. 11 U.S.C. § 302(a). Even

if filing jointly, a husband and wife are

subject to all the document filing requirements

of individual debtors. (The Official Forms

may be purchased at legal stationery stores or

downloaded from the internet at

http://www.uscourts.gov/bkforms/index.html.

They are not available from the court.)
17

The courts must charge a $245 case filing fee,

a $39 miscellaneous administrative fee, and a

$15 trustee surcharge. Normally, the fees must

be paid to the clerk of the court upon filing.

With the court’s permission, however,

individual debtors may pay in installments. 28

U.S.C. § 1930(a); Fed. R. Bankr. P. 1006(b);

Bankruptcy Court Miscellaneous Fee

Schedule, Item 8. The number of installments

is limited to four, and the debtor must make

the final installment no later than 120 days

after filing the petition. Fed. R. Bankr. P.

1006. For cause shown, the court may extend

the time of any installment, provided that the

last installment is paid not later than 180 days

after filing the petition. Id. The debtor may

also pay the $39 administrative fee and the

$15 trustee surcharge in installments. If a joint

petition is filed, only one filing fee, one

administrative fee, and one trustee surcharge

are charged. Debtors should be aware that

failure to pay these fees may result in

dismissal of the case. 11 U.S.C. § 707(a). 

If the debtor’s income is less than 150% of the

poverty level (as defined in the Bankruptcy

Code), and the debtor is unable to pay the

chapter 7 fees even in installments, the court

may waive the requirement that the fees be

paid. 28 U.S.C. § 1930(f). 

In order to complete the Official Bankruptcy

Forms that make up the petition, statement of

financial affairs, and schedules, the debtor

must provide the following information:

1. A list of all creditors and the amount and

nature of their claims;

2. The source, amount, and frequency of the

debtor’s income;

3. A list of all of the debtor’s property; and

4. A detailed list of the debtor’s monthly

living expenses, i.e., food, clothing, shelter,

utilities, taxes, transportation, medicine, etc. 

Married individuals must gather this

information for their spouse regardless of

whether they are filing a joint petition,

separate individual petitions, or even if only

one spouse is filing. In a situation where only

one spouse files, the income and expenses of

the non-filing spouse is required so that the

court, the trustee and creditors can evaluate

the household’s financial position.

Among the schedules that an individual debtor

will file is a schedule of “exempt” property.

The Bankruptcy Code allows an individual

debtor4

 to protect some property from the

claims of creditors because it is exempt under

federal bankruptcy law or under the laws of

the debtor’s home state. 11 U.S.C. § 522(b).

Many states have taken advantage of a

provision in the Bankruptcy Code that permits

each state to adopt its own exemption law in

place of the federal exemptions. In other

jurisdictions, the individual debtor has the

option of choosing between a federal package

of exemptions or the exemptions available

under state law. Thus, whether certain

property is exempt and may be kept by the

debtor is often a question of state law. The

debtor should consult an attorney to determine

the exemptions available in the state where

the debtor lives. 

Filing a petition under chapter 7

“automatically stays” (stops) most collection

actions against the debtor or the debtor’s

property. 11 U.S.C. § 362. But filing the

petition does not stay certain types of actions

listed under 11 U.S.C. § 362(b), and the stay

may be effective only for a short time in some

situations. The stay arises by operation of law
18

and requires no judicial action. As long as the

stay is in effect, creditors generally may not

initiate or continue lawsuits, wage

garnishments, or even telephone calls

demanding payments. The bankruptcy clerk

gives notice of the bankruptcy case to all

creditors whose names and addresses are

provided by the debtor.

Between 20 and 40 days after the petition is

filed, the case trustee (described below) will

hold a meeting of creditors. If the U.S. trustee

or bankruptcy administrator5

 schedules the

meeting at a place that does not have regular

U.S. trustee or bankruptcy administrator

staffing, the meeting may be held no more

than 60 days after the order for relief. Fed. R.

Bankr. P. 2003(a). During this meeting, the

trustee puts the debtor under oath, and both

the trustee and creditors may ask questions.

The debtor must attend the meeting and

answer questions regarding the debtor’s

financial affairs and property. 11 U.S.C. 

§ 343. If a husband and wife have filed a joint

petition, they both must attend the creditors’

meeting and answer questions. Within 10 days

of the creditors’ meeting, the U.S. trustee will

report to the court whether the case should be

presumed to be an abuse under the means test

described in 11 U.S.C. § 704(b). 

It is important for the debtor to cooperate with

the trustee and to provide any financial

records or documents that the trustee requests.

The Bankruptcy Code requires the trustee to

ask the debtor questions at the meeting of

creditors to ensure that the debtor is aware of

the potential consequences of seeking a

discharge in bankruptcy such as the effect on

credit history, the ability to file a petition

under a different chapter, the effect of

receiving a discharge, and the effect of

reaffirming a debt. Some trustees provide

written information on these topics at or

before the meeting to ensure that the debtor is

aware of this information. In order to preserve

their independent judgment, bankruptcy

judges are prohibited from attending the

meeting of creditors. 11 U.S.C. § 341(c). 

In order to accord the debtor complete relief,

the Bankruptcy Code allows the debtor to

convert a chapter 7 case to case under chapter

11, 12 or 136

 as long as the debtor is eligible

to be a debtor under the new chapter.

However, a condition of the debtor’s

voluntary conversion is that the case has not

previously been converted to chapter 7 from

another chapter. 11 U.S.C. § 706(a). Thus, the

debtor will not be permitted to convert the

case repeatedly from one chapter to another.

ROLE OF THE CASE TRUSTEE

When a chapter 7 petition is filed, the U.S.

trustee (or the bankruptcy court in Alabama

and North Carolina) appoints an impartial

case trustee to administer the case and

liquidate the debtor’s nonexempt assets. 11

U.S.C. §§ 701, 704. If all the debtor’s assets

are exempt or subject to valid liens, the trustee

will normally file a “no asset” report with the

court, and there will be no distribution to

unsecured creditors. Most chapter 7 cases

involving individual debtors are no asset

cases. But if the case appears to be an “asset”

case at the outset, unsecured creditors7

 must

file their claims with the court within 90 days

after the first date set for the meeting of

creditors. Fed. R. Bankr. P. 3002(c). A

governmental unit, however, has 180 days

from the date the case is filed to file a claim.

11 U.S.C. § 502(b)(9). In the typical no asset

chapter 7 case, there is no need for creditors to

file proofs of claim because there will be no

distribution. If the trustee later recovers assets
19

for distribution to unsecured creditors, the

Bankruptcy Court will provide notice to

creditors and will allow additional time to file

proofs of claim. Although a secured creditor

does not need to file a proof of claim in a

chapter 7 case to preserve its security interest

or lien, there may be other reasons to file a

claim. A creditor in a chapter 7 case who has

a lien on the debtor’s property should consult

an attorney for advice. 

Commencement of a bankruptcy case creates

an “estate.” The estate technically becomes

the temporary legal owner of all the debtor’s

property. It consists of all legal or equitable

interests of the debtor in property as of the

commencement of the case, including

property owned or held by another person if

the debtor has an interest in the property.

Generally speaking, the debtor’s creditors are

paid from nonexempt property of the estate. 

The primary role of a chapter 7 trustee in an

asset case is to liquidate the debtor’s

nonexempt assets in a manner that maximizes

the return to the debtor’s unsecured creditors.

The trustee accomplishes this by selling the

debtor’s property if it is free and clear of liens

(as long as the property is not exempt) or if it

is worth more than any security interest or lien

attached to the property and any exemption

that the debtor holds in the property. The

trustee may also attempt to recover money or

property under the trustee’s “avoiding

powers.” The trustee’s avoiding powers

include the power to: set aside preferential

transfers made to creditors within 90 days

before the petition; undo security interests and

other prepetition transfers of property that

were not properly perfected under

nonbankruptcy law at the time of the petition;

and pursue nonbankruptcy claims such as

fraudulent conveyance and bulk transfer

remedies available under state law. In

addition, if the debtor is a business, the

bankruptcy court may authorize the trustee to

operate the business for a limited period of

time, if such operation will benefit creditors

and enhance the liquidation of the estate. 11

U.S.C. § 721. 

Section 726 of the Bankruptcy Code governs

the distribution of the property of the estate.

Under § 726, there are six classes of claims;

and each class must be paid in full before the

next lower class is paid anything. The debtor

is only paid if all other classes of claims have

been paid in full. Accordingly, the debtor is

not particularly interested in the trustee’s

disposition of the estate assets, except with

respect to the payment of those debts which

for some reason are not dischargeable in the

bankruptcy case. The individual debtor’s

primary concerns in a chapter 7 case are to

retain exempt property and to receive a

discharge that covers as many debts as

possible.

THE CHAPTER 7 DISCHARGE

A discharge releases individual debtors from

personal liability for most debts and prevents

the creditors owed those debts from taking

any collection actions against the debtor.

Because a chapter 7 discharge is subject to

many exceptions, though, debtors should

consult competent legal counsel before filing

to discuss the scope of the discharge.

Generally, excluding cases that are dismissed

or converted, individual debtors receive a

discharge in more than 99 percent of chapter

7 cases. In most cases, unless a party in

interest files a complaint objecting to the

discharge or a motion to extend the time to

object, the bankruptcy court will issue a

discharge order relatively early in the case –
20

generally, 60 to 90 days after the date first set

for the meeting of creditors. Fed. R. Bankr. P.

4004(c). 

The grounds for denying an individual debtor

a discharge in a chapter 7 case are narrow and

are construed against the moving party.

Among other reasons, the court may deny the

debtor a discharge if it finds that the debtor:

failed to keep or produce adequate books or

financial records; failed to explain

satisfactorily any loss of assets; committed a

bankruptcy crime such as perjury; failed to

obey a lawful order of the bankruptcy court;

fraudulently transferred, concealed, or

destroyed property that would have become

property of the estate; or failed to complete an

approved instructional course concerning

financial management. 11 U.S.C. § 727; Fed.

R. Bankr. P. 4005. 

Secured creditors may retain some rights to

seize property securing an underlying debt

even after a discharge is granted. Depending

on individual circumstances, if a debtor

wishes to keep certain secured property (such

as an automobile), he or she may decide to

“reaffirm” the debt. A reaffirmation is an

agreement between the debtor and the creditor

that the debtor will remain liable and will pay

all or a portion of the money owed, even

though the debt would otherwise be

discharged in the bankruptcy. In return, the

creditor promises that it will not repossess or

take back the automobile or other property so

long as the debtor continues to pay the debt. 

If the debtor decides to reaffirm a debt, he or

she must do so before the discharge is entered.

The debtor must sign a written reaffirmation

agreement and file it with the court. 11 U.S.C.

§ 524(c). The Bankruptcy Code requires that

reaffirmation agreements contain an extensive

set of disclosures described in 11 U.S.C. §

524(k). Among other things, the disclosures

must advise the debtor of the amount of the

debt being reaffirmed and how it is calculated

and that reaffirmation means that the debtor’s

personal liability for that debt will not be

discharged in the bankruptcy. The disclosures

also require the debtor to sign and file a

statement of his or her current income and

expenses which shows that the balance of

income paying expenses is sufficient to pay

the reaffirmed debt. If the balance is not

enough to pay the debt to be reaffirmed, there

is a presumption of undue hardship, and the

court may decide not to approve the

reaffirmation agreement. Unless the debtor is

represented by an attorney, the bankruptcy

judge must approve the reaffirmation

agreement.

If the debtor was represented by an attorney in

connection with the reaffirmation agreement,

the attorney must certify in writing that he or

she advised the debtor of the legal effect and

consequences of the agreement, including a

default under the agreement. The attorney

must also certify that the debtor was fully

informed and voluntarily made the agreement

and that reaffirmation of the debt will not

create an undue hardship for the debtor or the

debtor’s dependants. 11 U.S.C. § 524(k). The

Bankruptcy Code requires a reaffirmation

hearing if the debtor has not been represented

by an attorney during the negotiating of the

agreement, or if the court disapproves the

reaffirmation agreement.11 U.S.C. § 524(d)

and (m). The debtor may repay any debt

voluntarily, however, whether or not a

reaffirmation agreement exists. 11 U.S.C. 

§ 524(f).

An individual receives a discharge for most of

his or her debts in a chapter 7 bankruptcy
21

case. A creditor may no longer initiate or

continue any legal or other action against the

debtor to collect a discharged debt. But not all

of an individual’s debts are discharged in

chapter 7. Debts not discharged include debts

for alimony and child support, certain taxes,

debts for certain educational benefit

overpayments or loans made or guaranteed by

a governmental unit, debts for willful and

malicious injury by the debtor to another

entity or to the property of another entity,

debts for death or personal injury caused by

the debtor’s operation of a motor vehicle

while the debtor was intoxicated from alcohol

or other substances, and debts for certain

criminal restitution orders.11 U.S.C. § 523(a).

The debtor will continue to be liable for these

types of debts to the extent that they are not

paid in the chapter 7 case. Debts for money or

property obtained by false pretenses, debts for

fraud or defalcation while acting in a fiduciary

capacity, and debts for willful and malicious

injury by the debtor to another entity or to the

property of another entity will be discharged

unless a creditor timely files and prevails in an

action to have such debts declared

nondischargeable. 11 U.S.C. § 523(c); Fed. R.

Bankr. P. 4007(c). 

The court may revoke a chapter 7 discharge

on the request of the trustee, a creditor, or the

U.S. trustee if the discharge was obtained

through fraud by the debtor, if the debtor

acquired property that is property of the estate

and knowingly and fraudulently failed to

report the acquisition of such property or to

surrender the property to the trustee, or if the

debtor (without a satisfactory explanation)

makes a material misstatement or fails to

provide documents or other information in

connection with an audit of the debtor’s case.

11 U.S.C. § 727(d). 

NOTES

1. The “current monthly income” received by

the debtor is a defined term in the Bankruptcy

Code and means the average monthly income

received over the six calendar months before

commencement of the bankruptcy case,

including regular contributions to household

expenses from nondebtors and including

income from the debtor’s spouse if the

petition is a joint petition, but not including

social security income or certain payments

made because the debtor is the victim of

certain crimes. 11 U.S.C. § 101(10A).

2. To determine whether a presumption of

abuse arises, all individual debtors with

primarily consumer debts who file a chapter 7

case must complete Official Bankruptcy Form

B22A, entitled “Statement of Current Monthly

Income and Means Test Calculation - For Use

in Chapter 7.” (The Official Forms may be

purchased at legal stationery stores or

downloaded from the internet at

http://www.uscourts.gov/bkforms/index.html.

They are not available from the court.)

3. An involuntary chapter 7 case may be

commenced under certain circumstances by a

petition filed by creditors holding claims

against the debtor. 11 U.S.C. § 303.

4. Each debtor in a joint case (both husband

and wife) can claim exemptions under the

federal bankruptcy laws. 11 U.S.C. § 522(m).

5. In North Carolina and Alabama,

bankruptcy administrators perform similar

functions that U.S. trustees perform in the

remaining 48 states. These duties include

establishing a panel of private trustees to

serve as trustees in chapter 7 cases and

supervising the administration of cases and
22

trustees in cases under chapters 7, 11, 12, and

13 of the Bankruptcy Code. The bankruptcy

administrator program is administered by the

Administrative Office of the United States

Courts, while the U.S. trustee program is

administered by the Department of Justice.

For purposes of this publication, references to

U.S. trustees are also applicable to bankruptcy

administrators.

6. A fee is charged for converting, on request

of the debtor, a case under chapter 7 to a case

under chapter 11. The fee charged is the

difference between the filing fee for a chapter

7 and the filing fee for a chapter 11. 28 U.S.C.

§ 1930(a). Currently, the difference is $755.

Id. There is no fee for converting from chapter

7 to chapter 13.

7. Unsecured debts generally may be defined

as those for which the extension of credit was

based purely upon an evaluation by the

creditor of the debtor’s ability to pay, as

opposed to secured debts, for which the

extension of credit was based upon the

creditor’s right to seize collateral on default,

in addition to the debtor’s ability to pay.
23

Chapter 13

Individual Debt Adjustment

BACKGROUND

A chapter 13 bankruptcy is also called a wage

earner’s plan. It enables individuals with

regular income to develop a plan to repay all

or part of their debts. Under this chapter,

debtors propose a repayment plan to make

installments to creditors over three to five

years. If the debtor’s current monthly income

is less than the applicable state median, the

plan will be for three years unless the court

approves a longer period “for cause.”1

 If the

debtor’s current monthly income is greater

than the applicable state median, the plan

generally must be for five years. In no case

may a plan provide for payments over a

period longer than five years. 11 U.S.C.

§1322(d). During this time the law forbids

creditors from starting or continuing

collection efforts.

This chapter discusses six aspects of a chapter

13 proceeding: the advantages of choosing

chapter 13, the chapter 13 eligibility

requirements, how a chapter 13 proceeding

works, what may be included in chapter 13

repayment plan and how it is confirmed,

making the plan work, and the special chapter

13 discharge.

ADVANTAGES OF CHAPTER 13

Chapter 13 offers individuals a number of

advantages over liquidation under chapter 7.

Perhaps most significantly, chapter 13 offers

individuals an opportunity to save their homes

from foreclosure. By filing under this chapter,

individuals can stop foreclosure proceedings

and may cure delinquent mortgage payments

over time. Nevertheless, they must still make

all mortgage payments that come due during

the chapter 13 plan on time. Another

advantage of chapter 13 is that it allows

individuals to reschedule secured debts (other

than a mortgage for their primary residence)

and extend them over the life of the chapter

13 plan. Doing this may lower the payments.

Chapter 13 also has a special provision that

protects third parties who are liable with the

debtor on “consumer debts.” This provision

may protect co-signers. Finally, chapter 13

acts like a consolidation loan under which the

individual makes the plan payments to a

chapter 13 trustee who then distributes

payments to creditors. Individuals will have

no direct contact with creditors while under

chapter 13 protection.

CHAPTER 13 ELIGIBILITY

Any individual, even if self-employed or

operating an unincorporated business, is

eligible for chapter 13 relief as long as the

individual’s unsecured debts are less than

$307,675 and secured debts are less than

$922,975. 11 U.S.C. § 109(e). These amounts

are adjusted periodically to reflect changes in

the consumer price index. A corporation or

partnership may not be a chapter 13 debtor.

Id. 

An individual cannot file under chapter 13 or

any other chapter if, during the preceding 180

days, a prior bankruptcy petition was

dismissed due to the debtor’s willful failure to

appear before the court or comply with orders

of the court or was voluntarily dismissed after

creditors sought relief from the bankruptcy

court to recover property upon which they

hold liens. 11 U.S.C. §§ 109(g), 362(d) and

(e). In addition, no individual may be a debtor
24

under chapter 13 or any chapter of the

Bankruptcy Code unless he or she has, within

180 days before filing, received credit

counseling from an approved credit

counseling agency either in an individual or

group briefing. 11 U.S.C. §§ 109, 111. There

are exceptions in emergency situations or

where the U.S. trustee (or bankruptcy

administrator) has determined that there are

insufficient approved agencies to provide the

required counseling. If a debt management

plan is developed during required credit

counseling, it must be filed with the court.

HOW CHAPTER 13 WORKS

A chapter 13 case begins by filing a petition

with the bankruptcy court serving the area

where the debtor has a domicile or residence.

Unless the court orders otherwise, the debtor

must also file with the court: (1) schedules of

assets and liabilities; (2) a schedule of current

income and expenditures; (3) a schedule of

executory contracts and unexpired leases; and

(4) a statement of financial affairs. Fed. R.

Bankr. P. 1007(b). The debtor must also file a

certificate of credit counseling and a copy of

any debt repayment plan developed through

credit counseling; evidence of payment from

employers, if any, received 60 days before

filing; a statement of monthly net income and

any anticipated increase in income or

expenses after filing; and a record of any

interest the debtor has in federal or state

qualified education or tuition accounts. 11

U.S.C. § 521. The debtor must provide the

chapter 13 case trustee with a copy of the tax

return or transcripts for the most recent tax

year as well as tax returns filed during the

case (including tax returns for prior years that

had not been filed when the case began). Id. A

husband and wife may file a joint petition or

individual petitions. 11 U.S.C. § 302(a). (The

Official Forms may be purchased at legal

stationery stores or downloaded from the

internet at

http://www.uscourts.gov/bkforms/index.html.

They are not available from the court.)

The courts must charge a $235 case filing fee

and a $39 miscellaneous administrative fee.

Normally the fees must be paid to the clerk of

the court upon filing. With the court’s

permission, however, they may be paid in

installments. 28 U.S.C. § 1930(a); Fed. R.

Bankr. P. 1006(b); Bankruptcy Court

Miscellaneous Fee Schedule, Item 8. The

number of installments is limited to four, and

the debtor must make the final installment no

later than 120 days after filing the petition.

Fed. R. Bankr. P. 1006(b). For cause shown,

the court may extend the time of any

installment, as long as the last installment is

paid no later than 180 days after filing the

petition. Id. The debtor may also pay the $39

administrative fee in installments. If a joint

petition is filed, only one filing fee and one

administrative fee are charged. Debtors should

be aware that failure to pay these fees may

result in dismissal of the case. 11 U.S.C. §

1307(c)(2).

In order to complete the Official Bankruptcy

Forms that make up the petition, statement of

financial affairs, and schedules, the debtor

must compile the following information:

1. A list of all creditors and the amounts and

nature of their claims;

2. The source, amount, and frequency of the

debtor’s income;

3. A list of all of the debtor’s property; and
25

4. A detailed list of the debtor’s monthly

living expenses, i.e., food, clothing, shelter,

utilities, taxes, transportation, medicine, etc. 

Married individuals must gather this

information for their spouse regardless of

whether they are filing a joint petition,

separate individual petitions, or even if only

one spouse is filing. In a situation where only

one spouse files, the income and expenses of

the non-filing spouse is required so that the

court, the trustee and creditors can evaluate

the household’s financial position. 

When an individual files a chapter 13 petition,

an impartial trustee is appointed to administer

the case. 11 U.S.C. § 1302. In some districts,

the U.S. trustee or bankruptcy administrator2

appoints a standing trustee to serve in all

chapter 13 cases. 28 U.S.C. § 586(b). The

chapter 13 trustee both evaluates the case and

serves as a disbursing agent, collecting

payments from the debtor and making

distributions to creditors. 11 U.S.C. § 1302(b).

Filing the petition under chapter 13

“automatically stays” (stops) most collection

actions against the debtor or the debtor’s

property. 11 U.S.C. § 362. Filing the petition

does not, however, stay certain types of

actions listed under 11 U.S.C. § 362(b), and

the stay may be effective only for a short time

in some situations. The stay arises by

operation of law and requires no judicial

action. As long as the stay is in effect,

creditors generally may not initiate or

continue lawsuits, wage garnishments, or even

make telephone calls demanding payments.

The bankruptcy clerk gives notice of the

bankruptcy case to all creditors whose names

and addresses are provided by the debtor.

Chapter 13 also contains a special automatic

stay provision that protects co-debtors. Unless

the bankruptcy court authorizes otherwise, a

creditor may not seek to collect a “consumer

debt” from any individual who is liable along

with the debtor. 11 U.S.C. § 1301(a).

Consumer debts are those incurred by an

individual primarily for a personal, family, or

household purpose. 11 U.S.C. § 101(8).

Individuals may use a chapter 13 proceeding

to save their home from foreclosure. The

automatic stay stops the foreclosure

proceeding as soon as the individual files the

chapter 13 petition. The individual may then

bring the past-due payments current over a

reasonable period of time. Nevertheless, the

debtor may still lose the home if the mortgage

company completes the foreclosure sale under

state law before the debtor files the petition.11

U.S.C. § 1322(c). The debtor may also lose

the home if he or she fails to make the regular

mortgage payments that come due after the

chapter 13 filing. 

Between 20 and 50 days after the debtor files

the chapter 13 petition, the chapter 13 trustee

will hold a meeting of creditors. If the U.S.

trustee or bankruptcy administrator schedules

the meeting at a place that does not have

regular U.S. trustee or bankruptcy

administrator staffing, the meeting may be

held no more than 60 days after the debtor

files. Fed. R. Bankr. P. 2003(a). During this

meeting, the trustee places the debtor under

oath, and both the trustee and creditors may

ask questions. The debtor must attend the

meeting and answer questions regarding his or

her financial affairs and the proposed terms of

the plan.11 U.S.C. § 343. If a husband and

wife file a joint petition, they both must attend

the creditors’ meeting and answer questions.

In order to preserve their independent

judgment, bankruptcy judges are prohibited

from attending the creditors’ meeting. 11
26

U.S.C. § 341(c). The parties typically resolve

problems with the plan either during or

shortly after the creditors’ meeting. Generally,

the debtor can avoid problems by making sure

that the petition and plan are complete and

accurate, and by consulting with the trustee

prior to the meeting. 

In a chapter 13 case, to participate in

distributions from the bankruptcy estate,

unsecured creditors must file their claims with

the court within 90 days after the first date set

for the meeting of creditors. Fed. R. Bankr. P.

3002(c). A governmental unit, however, has

180 days from the date the case is filed file a

proof of claim.11 U.S.C. § 502(b)(9).

After the meeting of creditors, the debtor, the

chapter 13 trustee, and those creditors who

wish to attend will come to court for a hearing

on the debtor’s chapter 13 repayment plan.

THE CHAPTER 13 PLAN AND

CONFIRMATION HEARING

Unless the court grants an extension, the

debtor must file a repayment plan with the

petition or within 15 days after the petition is

filed. Fed. R. Bankr. P. 3015. A plan must be

submitted for court approval and must provide

for payments of fixed amounts to the trustee

on a regular basis, typically biweekly or

monthly. The trustee then distributes the funds

to creditors according to the terms of the plan,

which may offer creditors less than full

payment on their claims.

There are three types of claims: priority,

secured, and unsecured. Priority claims are

those granted special status by the bankruptcy

law, such as most taxes and the costs of

bankruptcy proceeding.3

 Secured claims are

those for which the creditor has the right take

back certain property (i.e., the collateral) if

the debtor does not pay the underlying debt.

In contrast to secured claims, unsecured

claims are generally those for which the

creditor has no special rights to collect against

particular property owned by the debtor.

The plan must pay priority claims in full

unless a particular priority creditor agrees to

different treatment of the claim or, in the case

of a domestic support obligation, unless the

debtor contributes all “disposable income” -

discussed below - to a five-year plan.

11 U.S.C. § 1322(a).

If the debtor wants to keep the collateral

securing a particular claim, the plan must

provide that the holder of the secured claim

receive at least the value of the collateral. If

the obligation underlying the secured claim

was used the buy the collateral (e.g., a car

loan), and the debt was incurred within certain

time frames before the bankruptcy filing, the

plan must provide for full payment of the

debt, not just the value of the collateral (which

may be less due to depreciation). Payments to

certain secured creditors (i.e., the home

mortgage lender), may be made over the

original loan repayment schedule (which may

be longer than the plan) so long as any

arrearage is made up during the plan. The

debtor should consult an attorney to determine

the proper treatment of secured claims in the

plan.

The plan need not pay unsecured claims in

full as long it provides that the debtor will pay

all projected “disposable income” over an

“applicable commitment period,” and as long

as unsecured creditors receive at least as much

under the plan as they would receive if the

debtor’s assets were liquidated under chapter

7. 11 U.S.C. § 1325. In chapter 13,

“disposable income” is income (other than

child support payments received by the
27

debtor) less amounts reasonably necessary for

the maintenance or support of the debtor or

dependents and less charitable contributions

up to 15% of the debtor’s gross income. If the

debtor operates a business, the definition of

disposable income excludes those amounts

which are necessary for ordinary operating

expenses. 11 U.S.C. § 1325(b)(2)(A) and (B).

The “applicable commitment period” depends

on the debtor’s current monthly income. The

applicable commitment period must be three

years if current monthly income is less than

the state median for a family of the same size

- and five years if the current monthly income

is greater than a family of the same size. 11

U.S.C. § 1325(d). The plan may be less than

the applicable commitment period (three or

five years) only if unsecured debt is paid in

full over a shorter period.

Within 30 days after filing the bankruptcy

case, even if the plan has not yet been

approved by the court, the debtor must start

making plan payments to the trustee. 11

U.S.C. § 1326(a)(1). If any secured loan

payments or lease payments come due before

the debtor’s plan is confirmed (typically home

and automobile payments), the debtor must

make adequate protection payments directly

to the secured lender or lessor - deducting the

amount paid from the amount that would

otherwise be paid to the trustee. Id. 

No later than 45 days after the meeting of

creditors, the bankruptcy judge must hold a

confirmation hearing and decide whether the

plan is feasible and meets the standards for

confirmation set forth in the Bankruptcy

Code. 11 U.S.C. §§ 1324, 1325. Creditors will

receive 25 days’ notice of the hearing and

may object to confirmation. Fed. R. Bankr. P.

2002(b). While a variety of objections may be

made, the most frequent ones are that

payments offered under the plan are less than

creditors would receive if the debtor’s assets

were liquidated or that the debtor’s plan does

not commit all of the debtor’s projected

disposable income for the three or five year

applicable commitment period.

If the court confirms the plan, the chapter 13

trustee will distribute funds received under the

plan “as soon as is practicable.” 11 U.S.C.

§ 1326(a)(2). If the court declines to confirm

the plan, the debtor may file a modified plan.

11 U.S.C. § 1323. The debtor may also

convert the case to a liquidation case under

chapter 7.4

 11 U.S.C. § 1307(a). If the court

declines to confirm the plan or the modified

plan and instead dismisses the case, the court

may authorize the trustee to keep some funds

for costs, but the trustee must return all

remaining funds to the debtor (other than

funds already disbursed or due to creditors).

11 U.S.C. § 1326(a)(2). 

Occasionally, a change in circumstances may

compromise the debtor’s ability to make plan

payments. For example, a creditor may object

or threaten to object to a plan, or the debtor

may inadvertently have failed to list all

creditors. In such instances, the plan may be

modified either before or after confirmation.

11 U.S.C. §§ 1323, 1329. Modification after

confirmation is not limited to an initiative by

the debtor, but may be at the request of the

trustee or an unsecured creditor. 11 U.S.C. 

§ 1329(a).

MAKING THE PLAN WORK

The provisions of a confirmed plan bind the

debtor and each creditor. 11 U.S.C. § 1327.

Once the court confirms the plan, the debtor

must make the plan succeed. The debtor must

make regular payments to the trustee either

directly or through payroll deduction, which

will require adjustment to living on a fixed
28

budget for a prolonged period. Furthermore,

while confirmation of the plan entitles the

debtor to retain property as long as payments

are made, the debtor may not incur new debt

without consulting the trustee, because

additional debt may compromise the debtor’s

ability to complete the plan. 11 U.S.C. 

§§ 1305(c), 1322(a)(1), 1327. 

A debtor may make plan payments through

payroll deductions. This practice increases the

likelihood that payments will be made on time

and that the debtor will complete the plan. In

any event, if the debtor fails to make the

payments due under the confirmed plan, the

court may dismiss the case or convert it to a

liquidation case under chapter 7 of the

Bankruptcy Code. 11 U.S.C. § 1307(c). The

court may also dismiss or convert the debtor’s

case if the debtor fails to pay any post-filing

domestic support obligations (i.e., child

support, alimony), or fails to make required

tax filings during the case. 11 U.S.C. 

§§ 1307(c) and (e), 1308, 521.

THE CHAPTER 13 DISCHARGE

The bankruptcy law regarding the scope of the

chapter 13 discharge is complex and has

recently undergone major changes. Therefore,

debtors should consult competent legal

counsel prior to filing regarding the scope of

the chapter 13 discharge. 

A chapter 13 debtor is entitled to a discharge

upon completion of all payments under the

chapter 13 plan so long as the debtor: (1)

certifies (if applicable) that all domestic

support obligations that came due prior to

making such certification have been paid; (2)

has not received a discharge in a prior case

filed within a certain time frame (two years

for prior chapter 13 cases and four years for

prior chapter 7, 11 and 12 cases); and (3) has

completed an approved course in financial

management (if the U.S. trustee or bankruptcy

administrator for the debtor’s district has

determined that such courses are available to

the debtor). 11 U.S.C. § 1328. The court will

not enter the discharge, however, until it

determines, after notice and a hearing, that

there is no reason to believe there is any

pending proceeding that might give rise to a

limitation on the debtor’s homestead

exemption. 11 U.S.C. § 1328(h). 

The discharge releases the debtor from all

debts provided for by the plan or disallowed

(under section 502), with limited exceptions.

Creditors provided for in full or in part under

the chapter 13 plan may no longer initiate or

continue any legal or other action against the

debtor to collect the discharged obligations.

As a general rule, the discharge releases the

debtor from all debts provided for by the plan

or disallowed, with the exception of certain

debts referenced in 11 U.S.C. § 1328. Debts

not discharged in chapter 13 include certain

long term obligations (such as a home

mortgage), debts for alimony or child support,

certain taxes, debts for most government

funded or guaranteed educational loans or

benefit overpayments, debts arising from

death or personal injury caused by driving

while intoxicated or under the influence of

drugs, and debts for restitution or a criminal

fine included in a sentence on the debtor’s

conviction of a crime. To the extent that they

are not fully paid under the chapter 13 plan,

the debtor will still be responsible for these

debts after the bankruptcy case has concluded.

Debts for money or property obtained by false

pretenses, debts for fraud or defalcation while

acting in a fiduciary capacity, and debts for

restitution or damages awarded in a civil case

for willful or malicious actions by the debtor

that cause personal injury or death to a person
29

will be discharged unless a creditor timely

files and prevails in an action to have such

debts declared nondischargeable. 11 U.S.C. 

§§ 1328, 523(c); Fed. R. Bankr. P. 4007(c).

The discharge in a chapter 13 case is

somewhat broader than in a chapter 7 case.

Debts dischargeable in a chapter 13, but not in

chapter 7, include debts for willful and

malicious injury to property (as opposed to a

person), debts incurred to pay

nondischargeable tax obligations, and debts

arising from property settlements in divorce or

separation proceedings. 11 U.S.C. § 1328(a).

THE CHAPTER 13 HARDSHIP

DISCHARGE

After confirmation of a plan, circumstances

may arise that prevent the debtor from

completing the plan. In such situations, the

debtor may ask the court to grant a “hardship

discharge.” 11 U.S.C. § 1328(b). Generally,

such a discharge is available only if: (1) the

debtor’s failure to complete plan payments is

due to circumstances beyond the debtor’s

control and through no fault of the debtor; (2)

creditors have received at least as much as

they would have received in a chapter 7

liquidation case; and (3) modification of the

plan is not possible. Injury or illness that

precludes employment sufficient to fund even

a modified plan may serve as the basis for a

hardship discharge. The hardship discharge is

more limited than the discharge described

above and does not apply to any debts that are

nondischargeable in a chapter 7 case. 11

U.S.C. § 523. 

NOTES

1. The “current monthly income” received by

the debtor is a defined term in the Bankruptcy

Code and means the average monthly income

received over the six calendar months before

commencement of the bankruptcy case,

including regular contributions to household

expenses from nondebtors and including

income from the debtor’s spouse if the

petition is a joint petition, but not including

social security income or certain payments

made because the debtor is the victim of

certain crimes. 11 U.S.C. § 101(10A).

2. In North Carolina and Alabama, bankruptcy

administrators perform similar functions that

U.S. trustees perform in the remaining fortyeight states. The bankruptcy administrator

program is administered by the

Administrative Office of the United States

Courts, while the U.S. trustee program is

administered by the Department of Justice.

For purposes of this publication, references to

U.S. trustees are also applicable to bankruptcy

administrators.

3. Section 507 sets forth 10 categories of

unsecured claims which Congress has, for

public policy reasons, given priority of

distribution over other unsecured claims.

4. A fee of $15 is charged for converting a

case under chapter 13 to a case under chapter

7.
30

Chapter 11

Reorganization Under the

Bankruptcy Code

BACKGROUND

A case filed under chapter 11 of the United

States Bankruptcy Code is frequently referred

to as a “reorganization” bankruptcy.

An individual cannot file under chapter 11 or

any other chapter if, during the preceding 180

days, a prior bankruptcy petition was

dismissed due to the debtor’s willful failure to

appear before the court or comply with orders

of the court, or was voluntarily dismissed after

creditors sought relief from the bankruptcy

court to recover property upon which they

hold liens. 11 U.S.C. §§ 109(g), 362(d)-(e). In

addition, no individual may be a debtor under

chapter 11 or any chapter of the Bankruptcy

Code unless he or she has, within 180 days

before filing, received credit counseling from

an approved credit counseling agency either in

an individual or group briefing. 11 U.S.C. 

§§ 109, 111. There are exceptions in

emergency situations or where the U.S. trustee

(or bankruptcy administrator) has determined

that there are insufficient approved agencies

to provide the required counseling. If a debt

management plan is developed during

required credit counseling, it must be filed

with the court.

HOW CHAPTER 11 WORKS

A chapter 11 case begins with the filing of a

petition with the bankruptcy court serving the

area where the debtor has a domicile or

residence. A petition may be a voluntary

petition, which is filed by the debtor, or it may

be an involuntary petition, which is filed by

creditors that meet certain requirements. 11

U.S.C. §§ 301, 303. A voluntary petition must

adhere to the format of Form 1 of the Official

Forms prescribed by the Judicial Conference

of the United States. Unless the court orders

otherwise, the debtor also must file with the

court: (1) schedules of assets and liabilities;

(2) a schedule of current income and

expenditures; (3) a schedule of executory

contracts and unexpired leases; and (4) a

statement of financial affairs. Fed. R. Bankr.

P. 1007(b). If the debtor is an individual (or

husband and wife), there are additional

document filing requirements. Such debtors

must file: a certificate of credit counseling and

a copy of any debt repayment plan developed

through credit counseling; evidence of

payment from employers, if any, received 60

days before filing; a statement of monthly net

income and any anticipated increase in

income or expenses after filing; and a record

of any interest the debtor has in federal or

state qualified education or tuition

accounts.11 U.S.C. § 521. A husband and

wife may file a joint petition or individual

petitions. 11 U.S.C. § 302(a). (The Official

Forms are not available from the court, but

may be purchased at legal stationery stores or

downloaded from the internet at

http://www.uscourts.gov/bkforms/index.html.)

The courts are required to charge an $1,000

case filing fee and a $39 miscellaneous

administrative fee. The fees must be paid to

the clerk of the court upon filing or may, with

the court’s permission, be paid by individual

debtors in installments. 28 U.S.C. § 1930(a);

Fed. R. Bankr. P. 1006(b); Bankruptcy Court

Miscellaneous Fee Schedule, Item 8. Fed. R.

Bankr. P. 1006(b) limits to four the number of

installments for the filing fee. The final

installment must be paid not later than 120

days after filing the petition. For cause shown,

the court may extend the time of any
31

installment, provided that the last installment

is paid not later than 180 days after the filing

of the petition. Fed. R. Bankr. P. 1006(b). The

$39 administrative fee may be paid in

installments in the same manner as the filing

fee. If a joint petition is filed, only one filing

fee and one administrative fee are charged.

Debtors should be aware that failure to pay

these fees may result in dismissal of the case.

11 U.S.C. § 1112(b)(10).

The voluntary petition will include standard

information concerning the debtor’s name(s),

social security number or tax identification

number, residence, location of principal assets

(if a business), the debtor’s plan or intention

to file a plan, and a request for relief under the

appropriate chapter of the Bankruptcy Code.

Upon filing a voluntary petition for relief

under chapter 11 or, in an involuntary case,

the entry of an order for relief, the debtor

automatically assumes an additional identity

as the “debtor in possession.” 11 U.S.C. 

§ 1101. The term refers to a debtor that keeps

possession and control of its assets while

undergoing a reorganization under chapter 11,

without the appointment of a case trustee. A

debtor will remain a debtor in possession until

the debtor’s plan of reorganization is

confirmed, the debtor’s case is dismissed or

converted to chapter 7, or a chapter 11 trustee

is appointed. The appointment or election of

a trustee occurs only in a small number of

cases. Generally, the debtor, as “debtor in

possession,” operates the business and

performs many of the functions that a trustee

performs in cases under other chapters. 11

U.S.C. § 1107(a).

Generally, a written disclosure statement and

a plan of reorganization must be filed with the

court. 11 U.S.C. §§ 1121, 1125. The

disclosure statement is a document that must

contain information concerning the assets,

liabilities, and business affairs of the debtor

sufficient to enable a creditor to make an

informed judgment about the debtor’s plan of

reorganization. 11 U.S.C. § 1125. The

information required is governed by judicial

discretion and the circumstances of the case.

In a “small business case” (discussed below)

the debtor may not need to file a separate

disclosure statement if the court determines

that adequate information is contained in the

plan. 11 U.S.C. § 1125(f). The contents of the

plan must include a classification of claims

and must specify how each class of claims

will be treated under the plan. 11 U.S.C. 

§ 1123. Creditors whose claims are

“impaired,” i.e., those whose contractual

rights are to be modified or who will be paid

less than the full value of their claims under

the plan, vote on the plan by ballot. 11 U.S.C.

§ 1126. After the disclosure statement is

approved by the court and the ballots are

collected and tallied, the court will conduct a

confirmation hearing to determine whether to

confirm the plan.11 U.S.C. § 1128. 

In the case of individuals, chapter 11 bears

some similarities to chapter 13. For example,

property of the estate for an individual debtor

includes the debtor’s earnings and property

acquired by the debtor after filing until the

case is closed, dismissed or converted;

funding of the plan may be from the debtor’s

future earnings; and the plan cannot be

confirmed over a creditor’s objection without

committing all of the debtor’s disposable

income over five years unless the plan pays

the claim in full, with interest, over a shorter

period of time. 11 U.S.C. §§ 1115,

1123(a)(8), 1129(a)(15). 
32

THE CHAPTER 11 DEBTOR IN

POSSESSION

Chapter 11 is typically used to reorganize a

business, which may be a corporation, sole

proprietorship, or partnership. A corporation

exists separate and apart from its owners, the

stockholders. The chapter 11 bankruptcy case

of a corporation (corporation as debtor) does

not put the personal assets of the stockholders

at risk other than the value of their investment

in the company’s stock. A sole proprietorship

(owner as debtor), on the other hand, does not

have an identity separate and distinct from its

owner(s). Accordingly, a bankruptcy case

involving a sole proprietorship includes both

the business and personal assets of the

owners-debtors. Like a corporation, a

partnership exists separate and apart from its

partners. In a partnership bankruptcy case

(partnership as debtor), however, the partners’

personal assets may, in some cases, be used to

pay creditors in the bankruptcy case or the

partners, themselves, may be forced to file for

bankruptcy protection. 

Section 1107 of the Bankruptcy Code places

the debtor in possession in the position of a

fiduciary, with the rights and powers of a

chapter 11 trustee, and it requires the debtor to

perform of all but the investigative functions

and duties of a trustee. These duties, set forth

in the Bankruptcy Code and Federal Rules of

Bankruptcy Procedure, include accounting for

property, examining and objecting to claims,

and filing informational reports as required by

the court and the U.S. trustee or bankruptcy

administrator (discussed below), such as

monthly operating reports. 11 U.S.C. §§ 1106,

1107; Fed. R. Bankr. P. 2015(a). The debtor

in possession also has many of the other

powers and duties of a trustee, including the

right, with the court's approval, to employ

attorneys, accountants, appraisers,

auctioneers, or other professional persons to

assist the debtor during its bankruptcy case.

Other responsibilities include filing tax

returns and reports which are either necessary

or ordered by the court after confirmation,

such as a final accounting. The U.S. trustee is

responsible for monitoring the compliance of

the debtor in possession with the reporting

requirements. 

Railroad reorganizations have specific

requirements under subsection IV of chapter

11, which will not be addressed here. In

addition, stock and commodity brokers are

prohibited from filing under chapter 11 and

are restricted to chapter 7. 11 U.S.C. § 109(d).

THE U.S. TRUSTEE OR BANKRUPTCY

ADMINISTRATOR 

The U.S. trustee plays a major role in

monitoring the progress of a chapter 11 case

and supervising its administration. The U.S.

trustee is responsible for monitoring the

debtor in possession’s operation of the

business and the submission of operating

reports and fees. Additionally, the U.S. trustee

monitors applications for compensation and

reimbursement by professionals, plans and

disclosure statements filed with the court, and

creditors’ committees. The U.S. trustee

conducts a meeting of the creditors, often

referred to as the “section 341 meeting,” in a

chapter 11 case. 11 U.S.C. § 341. The U.S.

trustee and creditors may question the debtor

under oath at the section 341 meeting

concerning the debtor’s acts, conduct,

property, and the administration of the case. 

The U.S. trustee also imposes certain

requirements on the debtor in possession

concerning matters such as reporting its

monthly income and operating expenses,

establishing new bank accounts, and paying
33

current employee withholding and other taxes.

By law, the debtor in possession must pay a

quarterly fee to the U.S. trustee for each

quarter of a year until the case is converted or

dismissed. 28 U.S.C. § 1930(a)(6). The

amount of the fee, which may range from

$250 to $10,000, depends on the amount of

the debtor’s disbursements during each

quarter. Should a debtor in possession fail to

comply with the reporting requirements of the

U.S. trustee or orders of the bankruptcy court,

or fail to take the appropriate steps to bring

the case to confirmation, the U.S. trustee may

file a motion with the court to have the

debtor’s chapter 11 case converted to another

chapter of the Bankruptcy Code or to have the

case dismissed.

In North Carolina and Alabama, bankruptcy

administrators perform similar functions that

U.S. trustees perform in the remaining fortyeight states. The bankruptcy administrator

program is administered by the

Administrative Office of the United States

Courts, while the U.S. trustee program is

administered by the Department of Justice.

For purposes of this publication, references to

U.S. trustees are also applicable to bankruptcy

administrators.

CREDITORS’ COMMITTEES

Creditors’ committees can play a major role in

chapter 11 cases. The committee is appointed

by the U.S. trustee and ordinarily consists of

unsecured creditors who hold the seven

largest unsecured claims against the debtor.

11 U.S.C. § 1102. Among other things, the

committee: consults with the debtor in

possession on administration of the case;

investigates the debtor’s conduct and

operation of the business; and participates in

formulating a plan. 11 U.S.C. § 1103. A

creditors’ committee may, with the court’s

approval, hire an attorney or other

professionals to assist in the performance of

the committee’s duties. A creditors’

committee can be an important safeguard to

the proper management of the business by the

debtor in possession.

THE SMALL BUSINESS CASE AND

THE SMALL BUSINESS DEBTOR

In some smaller cases the U.S. trustee may be

unable to find creditors willing to serve on a

creditors’ committee, or the committee may

not be actively involved in the case. The

Bankruptcy Code addresses this issue by

treating a “small business case” somewhat

differently than a regular bankruptcy case. A

small business case is defined as a case with a

“small business debtor.” 11 U.S.C. 

§ 101(51C). Determination of whether a

debtor is a “small business debtor” requires

application of a two-part test. First, the debtor

must be engaged in commercial or business

activities (other than primarily owning or

operating real property) with total noncontingent liquidated secured and unsecured

debts of $2,000,000 or less. Second, the

debtor’s case must be one in which the U.S.

trustee has not appointed a creditors’

committee, or the court has determined the

creditors’ committee is insufficiently active

and representative to provide oversight of the

debtor. 11 U.S.C. § 101(51D). 

In a small business case, the debtor in

possession must, among other things, attach

the most recently prepared balance sheet,

statement of operations, cash-flow statement

and most recently filed tax return to the

petition or provide a statement under oath

explaining the absence of such documents and

must attend court and the U.S. trustee meeting

through senior management personnel and

counsel. The small business debtor must make
34

ongoing filings with the court concerning its

profitability and projected cash receipts and

disbursements, and must report whether it is

in compliance with the Bankruptcy Code and

the Federal Rules of Bankruptcy Procedure

and whether it has paid its taxes and filed its

tax returns. 11 U.S.C. §§ 308, 1116. 

In contrast to other chapter 11 debtors, the

small business debtor is subject to additional

oversight by the U.S. trustee. Early in the

case, the small business debtor must attend an

“initial interview” with the U.S. trustee at

which time the U.S. trustee will evaluate the

debtor’s viability, inquire about the debtor’s

business plan, and explain certain debtor

obligations including the debtor’s

responsibility to file various reports. 28

U.S.C. § 586(a)(7). The U.S. trustee will also

monitor the activities of the small business

debtor during the case to identify as promptly

as possible whether the debtor will be unable

to confirm a plan. 

Because certain filing deadlines are different

and extensions are more difficult to obtain, a

case designated as a small business case

normally proceeds more quickly than other

chapter 11 cases. For example, only the debtor

may file a plan during the first 180 days of a

small business case. 11 U.S.C. § 1121(e). This

“exclusivity period” may be extended by the

court, but only to 300 days, and only if the

debtor demonstrates by a preponderance of

the evidence that the court will confirm a plan

within a reasonable period of time. When the

case is not a small business case, however, the

court may extend the exclusivity period “for

cause” up to 18 months. 

THE SINGLE ASSET REAL ESTATE

DEBTOR

Single asset real estate debtors are subject to

special provisions of the Bankruptcy Code.

The term “single asset real estate” is defined

as “a single property or project, other than

residential real property with fewer than four

residential units, which generates substantially

all of the gross income of a debtor who is not

a family farmer and on which no substantial

business is being conducted by a debtor other

than the business of operating the real

property and activities incidental.” 11 U.S.C.

§ 101(51B). The Bankruptcy Code provides

circumstances under which creditors of a

single asset real estate debtor may obtain

relief from the automatic stay which are not

available to creditors in ordinary bankruptcy

cases. 11 U.S.C. § 362(d). On request of a

creditor with a claim secured by the single

asset real estate and after notice and a hearing,

the court will grant relief from the automatic

stay to the creditor unless the debtor files a

feasible plan of reorganization or begins

making interest payments to the creditor

within 90 days from the date of the filing of

the case, or within 30 days of the court’s

determination that the case is a single asset

real estate case. The interest payments must

be equal to the non-default contract interest

rate on the value of the creditor’s interest in

the real estate. 11 U.S.C. § 362(d)(3).

APPOINTMENT OR ELECTION OF A

 CASE TRUSTEE

Although the appointment of a case trustee is

a rarity in a chapter 11 case, a party in interest

or the U.S. trustee can request the

appointment of a case trustee or examiner at

any time prior to confirmation in a chapter 11

case. The court, on motion by a party in

interest or the U.S. trustee and after notice and
35

hearing, shall order the appointment of a case

trustee for cause, including fraud, dishonesty,

incompetence, or gross mismanagement, or if

such an appointment is in the interest of

creditors, any equity security holders, and

other interests of the estate. 11 U.S.C. 

§ 1104(a). Moreover, the U.S. trustee is

required to move for appointment of a trustee

if there are reasonable grounds to believe that

any of the parties in control of the debtor

“participated in actual fraud, dishonesty or

criminal conduct in the management of the

debtor or the debtor’s financial reporting.” 11

U.S.C. § 1104(e). The trustee is appointed by

the U.S. trustee, after consultation with parties

in interest and subject to the court’s approval.

Fed. R. Bankr. P. 2007.1. Alternatively, a

trustee in a case may be elected if a party in

interest requests the election of a trustee

within 30 days after the court orders the

appointment of a trustee. In that instance, the

U.S. trustee convenes a meeting of creditors

for the purpose of electing a person to serve as

trustee in the case. 11 U.S.C. § 1104(b). 

The case trustee is responsible for

management of the property of the estate,

operation of the debtor’s business, and, if

appropriate, the filing of a plan of

reorganization. Section 1106 of the

Bankruptcy Code requires the trustee to file a

plan “as soon as practicable” or, alternatively,

to file a report explaining why a plan will not

be filed or to recommend that the case be

converted to another chapter or dismissed. 11

U.S.C. § 1106(a)(5).

Upon the request of a party in interest or the

U.S. trustee, the court may terminate the

trustee’s appointment and restore the debtor in

possession to management of bankruptcy

estate at any time before confirmation.11

U.S.C. § 1105.

THE ROLE OF AN EXAMINER

The appointment of an examiner in a chapter

11 case is rare. The role of an examiner is

generally more limited than that of a trustee.

The examiner is authorized to perform the

investigatory functions of the trustee and is

required to file a statement of any

investigation conducted. If ordered to do so by

the court, however, an examiner may carry out

any other duties of a trustee that the court

orders the debtor in possession not to perform.

11 U.S.C. § 1106. Each court has the

authority to determine the duties of an

examiner in each particular case. In some

cases, the examiner may file a plan of

reorganization, negotiate or help the parties

negotiate, or review the debtor’s schedules to

determine whether some of the claims are

improperly categorized. Sometimes, the

examiner may be directed to determine if

objections to any proofs of claim should be

filed or whether causes of action have

sufficient merit so that further legal action

should be taken. The examiner may not

subsequently serve as a trustee in the case. 11

U.S.C. § 321. 

THE AUTOMATIC STAY 

The automatic stay provides a period of time

in which all judgments, collection activities,

foreclosures, and repossessions of property

are suspended and may not be pursued by the

creditors on any debt or claim that arose

before the filing of the bankruptcy petition. As

with cases under other chapters of the

Bankruptcy Code, a stay of creditor actions

against the chapter 11 debtor automatically

goes into effect when the bankruptcy petition

is filed. 11 U.S.C. § 362(a). The filing of a

petition, however, does not operate as a stay

for certain types of actions listed under 11

U.S.C. § 362(b). The stay provides a
36

breathing spell for the debtor, during which

negotiations can take place to try to resolve

the difficulties in the debtor’s financial

situation.

Under specific circumstances, the secured

creditor can obtain an order from the court

granting relief from the automatic stay. For

example, when the debtor has no equity in the

property and the property is not necessary for

an effective reorganization, the secured

creditor can seek an order of the court lifting

the stay to permit the creditor to foreclose on

the property, sell it, and apply the proceeds to

the debt. 11 U.S.C. § 362(d). 

The Bankruptcy Code permits applications for

fees to be made by certain professionals

during the case. Thus, a trustee, a debtor’s

attorney, or any professional person appointed

by the court may apply to the court at

intervals of 120 days for interim

compensation and reimbursement payments.

In very large cases with extensive legal work,

the court may permit more frequent

applications. Although professional fees may

be paid if authorized by the court, the debtor

cannot make payments to professional

creditors on prepetition obligations, i.e.,

obligations which arose before the filing of

the bankruptcy petition. The ordinary

expenses of the ongoing business, however,

continue to be paid.

WHO CAN FILE A PLAN

The debtor (unless a “small business debtor”)

has a 120-day period during which it has an

exclusive right to file a plan. 11 U.S.C. 

§ 1121(b). This exclusivity period may be

extended or reduced by the court. But, in no

event, may the exclusivity period, including

all extensions, be longer than 18 months. 11

U.S.C. § 1121(d). After the exclusivity period

has expired, a creditor or the case trustee may

file a competing plan. The U.S. trustee may

not file a plan. 11 U.S.C. § 307.

A chapter 11 case may continue for many

years unless the court, the U.S. trustee, the

committee, or another party in interest acts to

ensure the case’s timely resolution. The

creditors’ right to file a competing plan

provides incentive for the debtor to file a plan

within the exclusivity period and acts as a

check on excessive delay in the case. 

AVOIDABLE TRANSFERS

The debtor in possession or the trustee, as the

case may be, has what are called “avoiding”

powers. These powers may be used to undo a

transfer of money or property made during a

certain period of time before the filing of the

bankruptcy petition. By avoiding a particular

transfer of property, the debtor in possession

can cancel the transaction and force the return

or “disgorgement” of the payments or

property, which then are available to pay all

creditors. Generally, and subject to various

defenses, the power to avoid transfers is

effective against transfers made by the debtor

within 90 days before filing the petition. But

transfers to “insiders” (i.e., relatives, general

partners, and directors or officers of the

debtor) made up to a year before filing may be

avoided. 11 U.S.C. §§ 101(31), 101(54), 547,

548. In addition, under 11 U.S.C. § 544, the

trustee is authorized to avoid transfers under

applicable state law, which often provides for

longer time periods. Avoiding powers prevent

unfair prepetition payments to one creditor at

the expense of all other creditors.
37

CASH COLLATERAL, ADEQUATE

PROTECTION, AND OPERATING

CAPITAL

Although the preparation, confirmation, and

implementation of a plan of reorganization is

at the heart of a chapter 11 case, other issues

may arise that must be addressed by the

debtor in possession. The debtor in possession

may use, sell, or lease property of the estate in

the ordinary course of its business, without

prior approval, unless the court orders

otherwise. 11 U.S.C. § 363(c). If the intended

sale or use is outside the ordinary course of its

business, the debtor must obtain permission

from the court. 

A debtor in possession may not use “cash

collateral” without the consent of the secured

party or authorization by the court, which

must first examine whether the interest of the

secured party is adequately protected. 11

U.S.C. § 363. Section 363 defines “cash

collateral” as cash, negotiable instruments,

documents of title, securities, deposit

accounts, or other cash equivalents, whenever

acquired, in which the estate and an entity

other than the estate have an interest. It

includes the proceeds, products, offspring,

rents, or profits of property and the fees,

charges, accounts or payments for the use or

occupancy of rooms and other public facilities

in hotels, motels, or other lodging properties

subject to a creditor’s security interest. 

When “cash collateral” is used (spent), the

secured creditors are entitled to receive

additional protection under section 363 of the

Bankruptcy Code. The debtor in possession

must file a motion requesting an order from

the court authorizing the use of the cash

collateral. Pending consent of the secured

creditor or court authorization for the debtor

in possession’s use of cash collateral, the

debtor in possession must segregate and

account for all cash collateral in its

possession. 11 U.S.C. § 363(c)(4). A party

with an interest in property being used by the

debtor may request that the court prohibit or

condition this use to the extent necessary to

provide “adequate protection” to the creditor.

Adequate protection may be required to

protect the value of the creditor’s interest in

the property being used by the debtor in

possession. This is especially important when

there is a decrease in value of the property.

The debtor may make periodic or lump sum

cash payments, or provide an additional or

replacement lien that will result in the

creditor’s property interest being adequately

protected. 11 U.S.C. § 361.

When a chapter 11 debtor needs operating

capital, it may be able to obtain it from a

lender by giving the lender a court-approved

“superpriority” over other unsecured creditors

or a lien on property of the estate. 11 U.S.C.

§ 364. 

MOTIONS

Before confirmation of a plan, several

activities may take place in a chapter 11 case.

Continued operation of the debtor’s business

may lead to the filing of a number of

contested motions. The most common are

those seeking relief from the automatic stay,

the use of cash collateral, or to obtain credit.

There may also be litigation over executory

(i.e., unfulfilled) contracts and unexpired

leases and the assumption or rejection of those

executory contracts and unexpired leases by

the debtor in possession. 11 U.S.C. § 365.

Delays in formulating, filing, and obtaining

confirmation of a plan often prompt creditors

to file motions for relief from stay, to convert
38

the case to chapter 7, or to dismiss the case

altogether.

ADVERSARY PROCEEDINGS

Frequently, the debtor in possession will

institute a lawsuit, known as an adversary

proceeding, to recover money or property for

the estate. Adversary proceedings may take

the form of lien avoidance actions, actions to

avoid preferences, actions to avoid fraudulent

transfers, or actions to avoid post-petition

transfers. These proceedings are governed by

Part VII of the Federal Rules of Bankruptcy

Procedure. At times, a creditors’ committee

may be authorized by the bankruptcy court to

pursue these actions against insiders of the

debtor if the plan provides for the committee

to do so or if the debtor has refused a demand

to do so. Creditors may also initiate adversary

proceedings by filing complaints to determine

the validity or priority of a lien, revoke an

order confirming a plan, determine the

dischargeability of a debt, obtain an

injunction, or subordinate a claim of another

creditor.

CLAIMS

The Bankruptcy Code defines a claim as: (1)

a right to payment; (2) or a right to an

equitable remedy for a failure of performance

if the breach gives rise to a right to payment.

11 U.S.C. § 101(5). Generally, any creditor

whose claim is not scheduled (i.e., listed by

the debtor on the debtor’s schedules) or is

scheduled as disputed, contingent, or

unliquidated must file a proof of claim (and

attach evidence documenting the claim) in

order to be treated as a creditor for purposes

of voting on the plan and distribution under it.

Fed. R. Bankr. P. 3003(c)(2). But filing a

proof of claim is not necessary if the

creditor’s claim is scheduled (but is not listed

as disputed, contingent, or unliquidated by the

debtor) because the debtor’s schedules are

deemed to constitute evidence of the validity

and amount of those claims. 11 U.S.C. § 1111.

If a scheduled creditor chooses to file a claim,

a properly filed proof of claim supersedes any

scheduling of that claim. Fed. R. Bankr. P.

3003(c)(4). It is the responsibility of the

creditor to determine whether the claim is

accurately listed on the debtor’s schedules.

The debtor must provide notification to those

creditors whose names are added and whose

claims are listed as a result of an amendment

to the schedules. The notification also should

advise such creditors of their right to file

proofs of claim and that their failure to do so

may prevent them from voting upon the

debtor’s plan of reorganization or

participating in any distribution under that

plan. When a debtor amends the schedule of

liabilities to add a creditor or change the

status of any claims to disputed, contingent, or

unliquidated, the debtor must provide notice

of the amendment to any entity affected. Fed.

R. Bankr. P. 1009(a).

EQUITY SECURITY HOLDERS

An equity security holder is a holder of an

equity security of the debtor. Examples of an

equity security are a share in a corporation, an

interest of a limited partner in a limited

partnership, or a right to purchase, sell, or

subscribe to a share, security, or interest of a

share in a corporation or an interest in a

limited partnership. 11 U.S.C. § 101(16), (17).

An equity security holder may vote on the

plan of reorganization and may file a proof of

interest, rather than a proof of claim. A proof

of interest is deemed filed for any interest that

appears in the debtor’s schedules, unless it is

scheduled as disputed, contingent, or

unliquidated. 11 U.S.C. § 1111. An equity

security holder whose interest is not scheduled
39

or scheduled as disputed, contingent, or

unliquidated must file a proof of interest in

order to be treated as a creditor for purposes

of voting on the plan and distribution under it.

Fed. R. Bankr. P. 3003(c)(2). A properly filed

proof of interest supersedes any scheduling of

that interest. Fed. R. Bankr. P. 3003(c)(4).

Generally, most of the provisions that apply to

proofs of claim, as discussed above, are also

applicable to proofs of interest. 

CONVERSION OR DISMISSAL

A debtor in a case under chapter 11 has a onetime absolute right to convert the chapter 11

case to a case under chapter 7 unless: (1) the

debtor is not a debtor in possession; (2) the

case originally was commenced as an

involuntary case under chapter 11; or (3) the

case was converted to a case under chapter 11

other than at the debtor’s request. 11 U.S.C. 

§ 1112(a). A debtor in a chapter 11 case does

not have an absolute right to have the case

dismissed upon request.

A party in interest may file a motion to

dismiss or convert a chapter 11 case to a

chapter 7 case “for cause.” Generally, if cause

is established after notice and hearing, the

court must convert or dismiss the case

(whichever is in the best interests of creditors

and the estate) unless it specifically finds that

the requested conversion or dismissal is not in

the best interest of creditors and the estate. 11

U.S.C. § 1112(b). Alternatively, the court may

decide that appointment of a chapter 11

trustee or an examiner is in the best interests

of creditors and the estate. 11 U.S.C. 

§ 1104(a)(3). Section 1112(b)(4) of the

Bankruptcy Code sets forth numerous

examples of cause that would support

dismissal or conversion. For example, the

moving party may establish cause by showing

that there is substantial or continuing loss to

the estate and the absence of a reasonable

likelihood of rehabilitation; gross

mismanagement of the estate; failure to

maintain insurance that poses a risk to the

estate or the public; or unauthorized use of

cash collateral that is substantially harmful to

a creditor. 

Cause for dismissal or conversion also

includes an unexcused failure to timely

comply with reporting and filing

requirements; failure to attend the meeting of

creditors or attend a Fed. R. Bankr. P. 2004

examination without good cause; failure to

timely provide information to the U.S. trustee;

and failure to timely pay post-petition taxes or

timely file post-petition returns. Additionally,

failure to file a disclosure statement or to file

and confirm a plan within the time fixed by

the Bankruptcy Code or order of the court;

inability to effectuate a plan; denial or

revocation of confirmation; inability to

consummate a confirmed plan represent

“cause” for dismissal under the statute. In an

individual case, failure of the debtor to pay

post-petition domestic support obligations

constitutes “cause” for dismissal or

conversion.

Section 1112(c) of the Bankruptcy Code

provides an important exception to the

conversion process in a chapter 11 case.

Under this provision, the court is prohibited

from converting a case involving a farmer or

charitable institution to a liquidation case

under chapter 7 unless the debtor requests the

conversion.

THE DISCLOSURE STATEMENT

Generally, the debtor (or any plan proponent)

must file and get court approval of a written

disclosure statement before there can be a

vote on the plan of reorganization. The
40

disclosure statement must provide “adequate

information” concerning the affairs of the

debtor to enable the holder of a claim or

interest to make an informed judgment about

the plan. 11 U.S.C. § 1125. In a small

business case, however, the court may

determine that the plan itself contains

adequate information and that a separate

disclosure statement is unnecessary. 11 U.S.C.

§ 1125(f). After the disclosure statement is

filed, the court must hold a hearing to

determine whether the disclosure statement

should be approved. Acceptance or rejection

of a plan usually cannot be solicited until the

court has first approved the written disclosure

statement. 11 U.S.C. § 1125(b). An exception

to this rule exists if the initial solicitation of

the party occurred before the bankruptcy

filing, as would be the case in so-called

“prepackaged” bankruptcy plans (i.e., where

the debtor negotiates a plan with significant

creditor constituencies before filing for

bankruptcy). Continued post-filing solicitation

of such parties is not prohibited. After the

court approves the disclosure statement, the

debtor or proponent of a plan can begin to

solicit acceptances of the plan, and creditors

may also solicit rejections of the plan. 

Upon approval of a disclosure statement, the

plan proponent must mail the following to the

U.S. trustee and all creditors and equity

security holders: (1) the plan, or a court

approved summary of the plan; (2) the

disclosure statement approved by the court;

(3) notice of the time within which

acceptances and rejections of the plan may be

filed; and (4) such other information as the

court may direct, including any opinion of the

court approving the disclosure statement or a

court-approved summary of the opinion. Fed.

R. Bankr. P. 3017(d). In addition, the debtor

must mail to the creditors and equity security

holders entitled to vote on the plan or plans:

(1) notice of the time fixed for filing

objections; (2) notice of the date and time for

the hearing on confirmation of the plan; and

(3) a ballot for accepting or rejecting the plan

and, if appropriate, a designation for the

creditors to identify their preference among

competing plans. Id. But in a small business

case, the court may conditionally approve a

disclosure statement subject to final approval

after notice and a combined disclosure

statement/plan confirmation hearing. 11

U.S.C. § 1125(f).

ACCEPTANCE OF THE PLAN OF

REORGANIZATION

As noted earlier, only the debtor may file a

plan of reorganization during the first 120-day

period after the petition is filed (or after entry

of the order for relief, if an involuntary

petition was filed). The court may grant

extension of this exclusive period up to 18

months after the petition date. In addition, the

debtor has 180 days after the petition date or

entry of the order for relief to obtain

acceptances of its plan. 11 U.S.C. § 1121. The

court may extend (up to 20 months) or reduce

this acceptance exclusive period for cause. 11

U.S.C. § 1121(d). In practice, debtors

typically seek extensions of both the plan

filing and plan acceptance deadlines at the

same time so that any order sought from the

court allows the debtor two months to seek

acceptances after filing a plan before any

competing plan can be filed.

If the exclusive period expires before the

debtor has filed and obtained acceptance of a

plan, other parties in interest in a case, such as

the creditors’ committee or a creditor, may

file a plan. Such a plan may compete with a

plan filed by another party in interest or by the

debtor. If a trustee is appointed, the trustee

must file a plan, a report explaining why the
41

trustee will not file a plan, or a

recommendation for conversion or dismissal

of the case. 11 U.S.C. § 1106(a)(5). A

proponent of a plan is subject to the same

requirements as the debtor with respect to

disclosure and solicitation.

In a chapter 11 case, a liquidating plan is

permissible. Such a plan often allows the

debtor in possession to liquidate the business

under more economically advantageous

circumstances than a chapter 7 liquidation. It

also permits the creditors to take a more active

role in fashioning the liquidation of the assets

and the distribution of the proceeds than in a

chapter 7 case.

Section 1123(a) of the Bankruptcy Code lists

the mandatory provisions of a chapter 11 plan,

and section 1123(b) lists the discretionary

provisions. Section 1123(a)(1) provides that a

chapter 11 plan must designate classes of

claims and interests for treatment under the

reorganization. Generally, a plan will classify

claim holders as secured creditors, unsecured

creditors entitled to priority, general

unsecured creditors, and equity security

holders. 

Under section 1126(c) of the Bankruptcy

Code, an entire class of claims is deemed to

accept a plan if the plan is accepted by

creditors that hold at least two-thirds in

amount and more than one-half in number of

the allowed claims in the class. Under section

1129(a)(10), if there are impaired classes of

claims, the court cannot confirm a plan unless

it has been accepted by at least one class of

non-insiders who hold impaired claims (i.e.,

claims that are not going to be paid

completely or in which some legal, equitable,

or contractual right is altered). Moreover,

under section 1126(f), holders of unimpaired

claims are deemed to have accepted the plan.

Under section 1127(a) of the Bankruptcy

Code, the plan proponent may modify the plan

at any time before confirmation, but the plan

as modified must meet all the requirements of

chapter 11. When there is a proposed

modification after balloting has been

conducted, and the court finds after a hearing

that the proposed modification does not

adversely affect the treatment of any creditor

who has not accepted the modification in

writing, the modification is deemed to have

been accepted by all creditors who previously

accepted the plan. Fed. R. Bankr. P. 3019. If

it is determined that the proposed

modification does have an adverse effect on

the claims of non-consenting creditors, then

another balloting must take place. 

Because more than one plan may be submitted

to the creditors for approval, every proposed

plan and modification must be dated and

identified with the name of the entity or

entities submitting the plan or modification.

Fed. R. Bankr. P. 3016(b). When competing

plans are presented that meet the requirements

for confirmation, the court must consider the

preferences of the creditors and equity

security holders in determining which plan to

confirm.

Any party in interest may file an objection to

confirmation of a plan. The Bankruptcy Code

requires the court, after notice, to hold a

hearing on confirmation of a plan. If no

objection to confirmation has been timely

filed, the Bankruptcy Code allows the court to

determine whether the plan has been proposed

in good faith and according to law. Fed. R.

Bankr. P. 3020(b)(2). Before confirmation can

be granted, the court must be satisfied that

there has been compliance with all the other

requirements of confirmation set forth in

section 1129 of the Bankruptcy Code, even in

the absence of any objections. In order to
42

confirm the plan, the court must find, among

other things, that: (1) the plan is feasible; (2)

it is proposed in good faith; and (3) the plan

and the proponent of the plan are in

compliance with the Bankruptcy Code. In

order to satisfy the feasibility requirement, the

court must find that confirmation of the plan

is not likely to be followed by liquidation

(unless the plan is a liquidating plan) or the

need for further financial reorganization.

THE DISCHARGE

Section 1141(d)(1) generally provides that

confirmation of a plan discharges a debtor

from any debt that arose before the date of

confirmation. After the plan is confirmed, the

debtor is required to make plan payments and

is bound by the provisions of the plan of

reorganization. The confirmed plan creates

new contractual rights, replacing or

superseding pre-bankruptcy contracts.

There are, of course, exceptions to the general

rule that an order confirming a plan operates

as a discharge. Confirmation of a plan of

reorganization discharges any type of debtor

– corporation, partnership, or individual –

from most types of prepetition debts. It does

not, however, discharge an individual debtor

from any debt made nondischargeable by

section 523 of the Bankruptcy Code.1

Moreover, except in limited circumstances, a

discharge is not available to an individual

debtor unless and until all payments have

been made under the plan. 11 U.S.C. §

1141(d)(5). Confirmation does not discharge

the debtor if the plan is a liquidation plan, as

opposed to one of reorganization, unless the

debtor is an individual. When the debtor is an

individual, confirmation of a liquidation plan

will result in a discharge (after plan payments

are made) unless grounds would exist for

denying the debtor a discharge if the case

were proceeding under chapter 7 instead of

chapter 11. 11 U.S.C. §§ 727(a), 1141(d). 

POSTCONFIRMATION

MODIFICATION OF THE PLAN

At any time after confirmation and before

“substantial consummation” of a plan, the

proponent of a plan may modify the plan if the

modified plan would meet certain Bankruptcy

Code requirements. 11 U.S.C. § 1127(b). This

should be distinguished from preconfirmation

modification of the plan. A modified

postconfirmation plan does not automatically

become the plan. A modified

postconfirmation plan in a chapter 11 case

becomes the plan only “if circumstances

warrant such modification” and the court,

after notice and hearing, confirms the plan as

modified. If the debtor is an individual, the

plan may be modified postconfirmation upon

the request of the debtor, the trustee, the U.S.

trustee, or the holder of an allowed unsecured

claim to make adjustments to payments due

under the plan. 11 U.S.C. § 1127(e).

POSTCONFIRMATION

ADMINISTRATION

Notwithstanding the entry of the confirmation

order, the court has the authority to issue any

other order necessary to administer the estate.

Fed. R. Bankr. P. 3020(d). This authority

would include the postconfirmation

determination of objections to claims or

adversary proceedings, which must be

resolved before a plan can be fully

consummated. Sections 1106(a)(7) and

1107(a) of the Bankruptcy Code require a

debtor in possession or a trustee to report on

the progress made in implementing a plan

after confirmation. A chapter 11 trustee or

debtor in possession has a number of

responsibilities to perform after confirmation,
43

including consummating the plan, reporting

on the status of consummation, and applying

for a final decree.

REVOCATION OF THE

CONFIRMATION ORDER

Revocation of the confirmation order is an

undoing or cancellation of the confirmation of

a plan. A request for revocation of

confirmation, if made at all, must be made by

a party in interest within 180 days of

confirmation. The court, after notice and

hearing, may revoke a confirmation order “if

and only if the [confirmation] order was

procured by fraud.” 11 U.S.C. § 1144.

THE FINAL DECREE

A final decree closing the case must be

entered after the estate has been “fully

administered.” Fed. R. Bankr. P. 3022. Local

bankruptcy court policies generally determine

when the final decree is entered and the case

closed.

NOTES

1. Debts not discharged include debts for

alimony and child support, certain taxes, debts

for certain educational benefit overpayments

or loans made or guaranteed by a

governmental unit, debts for willful and

malicious injury by the debtor to another

entity or to the property of another entity,

debts for death or personal injury caused by

the debtor’s operation of a motor vehicle

while the debtor was intoxicated from alcohol

or other substances, and debts for certain

criminal restitution orders.11 U.S.C. § 523(a).

The debtor will continue to be liable for these

types of debts to the extent that they are not

paid in the chapter 11 case. Debts for money

or property obtained by false pretenses, debts

for fraud or defalcation while acting in a

fiduciary capacity, and debts for willful and

malicious injury by the debtor to another

entity or to the property of another entity will

be discharged unless a creditor timely files

and prevails in an action to have such debts

declared nondischargeable. 11 U.S.C. 

§ 523(c); Fed. R. Bankr. P. 4007(c).
44

Chapter 12

Family Farmer or Family Fisherman

Bankruptcy

BACKGROUND

Chapter 12 is designed for “family farmers” or

“family fishermen” with “regular annual

income.” It enables financially distressed

family farmers and fishermen to propose and

carry out a plan to repay all or part of their

debts. Under chapter 12, debtors propose a

repayment plan to make installments to

creditors over three to five years. Generally,

the plan must provide for payments over

three years unless the court approves a longer

period “for cause.” But unless the plan

proposes to pay 100% of domestic support

claims (i.e., child support and alimony) if any

exist, it must be for five years and must

include all of the debtor’s disposable income.

In no case may a plan provide for payments

over a period longer than five years. 11 U.S.C.

§ 1222(b)-(c).

In tailoring bankruptcy law to meet the

economic realities of family farming and the

family fisherman, chapter 12 eliminates many

of the barriers such debtors would face if

seeking to reorganize under either chapter 11

or 13 of the Bankruptcy Code. For example,

chapter 12 is more streamlined, less

complicated, and less expensive than chapter

11, which is better suited to large corporate

reorganizations. In addition, few family

farmers or fishermen find chapter 13 to be

advantageous because it is designed for wage

earners who have smaller debts than those

facing family farmers. In chapter 12, Congress

sought to combine the features of the

Bankruptcy Code which can provide a

framework for successful family farmer and

fisherman reorganizations.

The Bankruptcy Code provides that only a

family farmer or family fisherman with

“regular annual income” may file a petition

for relief under chapter 12. 11 U.S.C.

§§ 101(18), 101(19A), 109(f). The purpose of

this requirement is to ensure that the debtor’s

annual income is sufficiently stable and

regular to permit the debtor to make payments

under a chapter 12 plan. But chapter 12 makes

allowance for situations in which family

farmers or fishermen have income that is

seasonal in nature. Relief under chapter 12 is

voluntary, and only the debtor may file a

petition under the chapter. 

Under the Bankruptcy Code, “family farmers”

and “family fishermen” fall into two

categories: (1) an individual or individual and

spouse and (2) a corporation or partnership.

Farmers or fishermen falling into the first

category must meet each of the following four

criteria as of the date the petition is filed in

order to qualify for relief under chapter 12: 

1. The individual or husband and wife must

be engaged in a farming operation or a

commercial fishing operation. 

2. The total debts (secured and unsecured) of

the operation must not exceed $3,237,000 (if

a farming operation) or $1,500,000 (if a

commercial fishing operation). 

3. If a family farmer, at least 50%, and if

family fisherman at least 80%, of the total

debts that are fixed in amount (exclusive of

debt for the debtor’s home) must be related to

the farming or commercial fishing operation.

4. More than 50% of the gross income of the

individual or the husband and wife for the
45

preceding tax year (or, for family farmers

only, for each of the 2nd and 3rd prior tax

years) must have come from the farming or

commercial fishing operation. 

In order for a corporation or partnership to fall

within the second category of debtors eligible

to file as family farmers or family fishermen,

the corporation or partnership must meet each

of the following criteria as of the date of the

filing of the petition: 

1. More than one-half the outstanding stock or

equity in the corporation or partnership must

be owned by one family or by one family and

its relatives. 

2. The family or the family and its relatives

must conduct the farming or commercial

fishing operation. 

3. More than 80% of the value of the

corporate or partnership assets must be related

to the farming or fishing operation. 

4. The total indebtedness of the corporation or

partnership must not exceed $3,237,000 (if a

farming operation) or $1,500,000 (if a

commercial fishing operation). 

5. At least 50% for a farming operation or

80% for a fishing operation of the

corporation’s or partnership’s total debts

which are fixed in amount (exclusive of debt

for one home occupied by a shareholder) must

be related to the farming or fishing operation.

6. If the corporation issues stock, the stock

cannot be publicly traded.

A debtor cannot file under chapter 12 (or any

other chapter) if during the preceding 180

days a prior bankruptcy petition was

dismissed due to the debtor’s willful failure to

appear before the court or comply with orders

of the court or was voluntarily dismissed after

creditors sought relief from the bankruptcy

court to recover property upon which they

hold liens. 11 U.S.C. §§ 109(g), 362(d) and

(e). In addition, no individual may be a debtor

under chapter 12 or any chapter of the

Bankruptcy Code unless he or she has, within

180 days before filing, received credit

counseling from an approved credit

counseling agency either in an individual or

group briefing. 11 U.S.C. §§ 109, 111. There

are exceptions in emergency situations or

where the U.S. trustee (or bankruptcy

administrator)1

 has determined that there are

insufficient approved agencies to provide the

required counseling. If a debt management

plan is developed during required credit

counseling, it must be filed with the court.

HOW CHAPTER 12 WORKS

A chapter 12 case begins by filing a petition

with the bankruptcy court serving the area

where the individual lives or where the

corporation or partnership debtor has its

principal place of business or principal assets.

Unless the court orders otherwise, the debtor

also shall file with the court (1) schedules of

assets and liabilities, (2) a schedule of current

income and expenditures, (3) a schedule of

executory contracts and unexpired leases, and

(4) a statement of financial affairs. Fed. R.

Bankr. P. 1007(b). A husband and wife may

file a joint petition or individual petitions. 11

U.S.C. § 302(a). (The Official Forms may be

purchased at legal stationery stores or

downloaded from the internet at

http://www.uscourts.gov/bkforms/index.html.

They are not available from the court.)

The courts must charge a $200 case filing fee

and a $39 miscellaneous administrative fee.

Normally the fees should be paid to the clerk
46

of the court upon filing. With the court’s

permission, however, they may be paid in

installments. 28 U.S.C. § 1930(a); Fed. R.

Bankr. P. 1006(b); Bankruptcy Court

Miscellaneous Fee Schedule, Item 8. The

number of such installments is limited to four

and the debtor must make the final installment

no later than 120 days after filing the petition.

Fed. R. Bankr. P. 1006(b). For cause shown,

the court may extend the time of any

installment, provided that the last installment

is paid not later than 180 days after the filing

of the petition. Id. The debtor may also pay

the $39 administrative fee in installments. If a

joint petition is filed, only one filing fee and

one administrative fee are charged. Debtors

should be aware that failure to pay these fees

may result in dismissal of the case. 11 U.S.C.

§ 1208(c)(2).

In order to complete the Official Bankruptcy

Forms which make up the petition, statement

of financial affairs, and schedules, the debtor

will need to compile the following

information: 

1. A list of all creditors and the amounts and

nature of their claims; 

2. The source, amount, and frequency of the

debtor’s income; 

3. A list of all of the debtor’s property; and 

4. A detailed list of the debtor’s monthly

farming and living expenses, i.e., food,

shelter, utilities, taxes, transportation,

medicine, feed, fertilizer, etc. 

Married individuals must gather this

information for each spouse regardless of

whether they are filing a joint petition,

separate individual petitions, or even if only

one spouse is filing. In a situation where only

one spouse files, the income and expenses of

the non-filing spouse is required so that the

court, the trustee, and the creditors can

evaluate the household’s financial position.

When a chapter 12 petition is filed, an

impartial trustee is appointed to administer the

case. 11 U.S.C. § 1202. In some districts, the

U.S. trustee appoints a standing trustee to

serve in all chapter 12 cases. 28 U.S.C. 

§ 586(b). As in chapter 13, the trustee both

evaluates the case and serves as a disbursing

agent, collecting payments from the debtor

and making distributions to creditors. 11

U.S.C. § 1202.

Filing the petition under chapter 12

“automatically stays” (stops) most collection

actions against the debtor or the debtor’s

property. 11 U.S.C. § 362. Filing the petition

does not, however, stay certain types of

actions listed under 11 U.S.C. § 362(b). The

stay arises by operation of law and requires no

judicial action. As long as the stay is in effect,

creditors generally cannot initiate or continue

any lawsuits, wage garnishments, or even

telephone calls demanding payments. The

bankruptcy clerk gives notice of the

bankruptcy case to all creditors whose names

and addresses are provided by the debtor.

Chapter 12 also contains a special automatic

stay provision that protects co-debtors. Unless

the bankruptcy court authorizes otherwise, a

creditor may not seek to collect a “consumer

debt” from any individual who is liable with

the debtor. 11 U.S.C. § 1201(a). Consumer

debts are those incurred by an individual

primarily for a personal, family, or household

purpose. 11 U.S.C. § 101(8).

Between 20 to 35 days after the petition is

filed, the chapter 12 trustee will hold a

“meeting of creditors.” If the U.S. trustee or
47

bankruptcy administrator schedules the

meeting at a place that does not have regular

U.S. trustee or bankruptcy administrator

staffing, the meeting may be held no more

than 60 days after the debtor files. During the

meeting the trustee puts the debtor under oath

and both the trustee and creditors may ask

questions. The debtor must attend the meeting

and answer questions regarding the debtor’s

financial affairs and the proposed terms of the

debtor’s repayment plan. 11 U.S.C. § 343;

Fed. R. Bankr. P. 4002. If a husband and wife

have filed a joint petition, they both must

attend the creditors’ meeting. In order to

preserve their independent judgment,

bankruptcy judges are prohibited from

attending. 11 U.S.C. § 341(c). The parties

typically resolve problems with the plan either

during or shortly after the creditors’ meeting.

Generally, the debtor can avoid problems by

making sure that the petition and plan are

complete and accurate, and by consulting with

the trustee prior to the meeting. 

In a chapter 12 case, to participate in

distributions from the bankruptcy estate,

unsecured creditors must file their claims with

the court within 90 days after the first date set

for the meeting of creditors. Fed. R. Bankr. P.

3002(c). A governmental unit, however, has

180 days from the date the case is filed file a

proof of claim. 11 U.S.C. § 502(b)(9). 

After the meeting of creditors, the debtor, the

chapter 12 trustee, and interested creditors

will attend a hearing on confirmation of the

debtor’s chapter 12 repayment plan.

THE CHAPTER 12 PLAN AND

CONFIRMATION HEARING

Unless the court grants an extension, the

debtor must file a plan of repayment with the

petition or within 90 days after filing the

petition. 11 U.S.C. § 1221. The plan, which

must be submitted to the court for approval,

provides for payments of fixed amounts to the

trustee on a regular basis. The trustee then

distributes the funds to creditors according to

the terms of the plan, which typically offers

creditors less than full payment on their

claims.

There are three types of claims: priority,

secured, and unsecured. Priority claims are

those granted special status by the bankruptcy

law, such as most taxes and the costs of

bankruptcy proceeding.2

 Secured claims are

those for which the creditor has the right to

liquidate certain property if the debtor does

not pay the underlying debt. In contrast to

secured claims, unsecured claims are

generally those for which the creditor has no

special rights to collect against particular

property owned by the debtor.

A chapter 12 plan usually lasts three to five

years. It must provide for full payment of all

priority claims, unless a priority creditor

agrees to different treatment of the claim or,

in the case of a domestic support obligation,

unless the debtor contributes all “disposable

income” - discussed below - to a five-year

plan. 11 U.S.C. § 1222(a)(2), (4). 

Secured creditors must be paid at least as

much as the value of the collateral pledged for

the debt. One of the features of Chapter 12 is

that payments to secured creditors can

sometimes continue longer than the three-tofive-year period of the plan. For example, if

the debtor’s underlying debt obligation was

scheduled to be paid over more than five years

(i.e., an equipment loan or a mortgage), the

debtor may be able to pay the loan off over

the original loan repayment schedule as long

as any arrearage is made up during the plan.
48

The plan does not have to pay unsecured

claims in full, as long as it commits all of the

debtor’s projected “disposable income” (or

property of equivalent value) to plan

payments over a 3 to 5 year period ,and as

long as the unsecured creditors are to receive

at least as much as they would receive if the

debtor’s nonexempt assets were liquidated

under chapter 7. 11 U.S.C. § 1225.

“Disposable income” is defined as income not

reasonably necessary for the maintenance or

support of the debtor or dependents or for

making payments needed to continue,

preserve, and operate the debtor’s business. 11

U.S.C. § 1225(b)(2). 

Within 45 days after filing the plan, the

presiding bankruptcy judge decides at a

“confirmation hearing” whether the plan is

feasible and meets the standards for

confirmation under the Bankruptcy Code. 11

U.S.C. §§ 1224, 1225. Creditors, who receive

20 days’ notice, may appear at the hearing and

object to confirmation. Fed. R. Bankr. P.

2002(a)(8). While a variety of objections may

be made, the typical arguments are that

payments offered under the plan are less than

creditors would receive if the debtor’s assets

were liquidated, or that the plan does not

commit all of the debtor’s disposable income

for the three-to-five-year period of the plan. 

If the court confirms the plan, the chapter 12

trustee will distribute funds received in

accordance with the terms of the plan.11

U.S.C. § 1226(a). If the court does not

confirm the plan, the debtor may file a

modified plan. 11 U.S.C. § 1223. The debtor

may also convert the case to a liquidation

under chapter 7.3

 11 U.S.C. § 1208(a). If the

debtor fails to confirm a plan and the case is

dismissed, the court may authorize the trustee

to keep some of the funds for costs, but the

trustee must return all remaining funds to the

debtor (other than funds already disbursed to

creditors). 11 U.S.C. § 1226(a). 

On occasion, changed circumstances will

affect the debtor’s ability to make plan

payments. A creditor may object or threaten to

object to a plan, or the debtor may

inadvertently have failed to list all creditors.

In such instances, the plan may be modified

either before or after confirmation. 11 U.S.C.

§§ 1223, 1229. Modification after

confirmation is not limited to an initiative by

the debtor, but may also be made at the

request of the trustee or an unsecured

creditor.11 U.S.C. § 1229(a).

MAKING THE PLAN WORK

The provisions of a confirmed plan bind the

debtor and each creditor. 11 U.S.C. § 1227.

Once the court confirms the plan, the debtor

must make the plan succeed. The debtor must

make regular payments to the trustee, which

will require adjustment to living on a fixed

budget for a prolonged period. Furthermore,

while confirmation of the plan entitles the

debtor to retain property as long as payments

are made, the debtor may not incur any

significant new debt without consulting the

trustee, because additional debt may

compromise the debtor’s ability to complete

the plan.11 U.S.C. §§ 1222(a)(1), 1227. In

any event, failure to make the plan payments

may result in dismissal of the case. 11 U.S.C.

§ 1208(c). In addition, the court may dismiss

the case or convert the case to a liquidation

case under chapter 7 of the Bankruptcy Code

upon a showing that the debtor has committed

fraud in connection with the case. 11 U.S.C. 

§ 1208(d). 
49

THE CHAPTER 12 DISCHARGE

The debtor will receive a discharge after

completing all payments under the chapter 12

plan as long as the debtor certifies (if

applicable) that all domestic support

obligations that came due before making such

certification have been paid. The discharge

has the effect of releasing the debtor from all

debts provided for by the plan allowed under

section 503 or disallowed under section 502,

with limited exceptions. Those creditors who

were provided for in full or in part under the

plan may no longer initiate or continue any

legal or other action against the debtor to

collect the discharged obligations. 

Certain categories of debts are not discharged

in chapter 12 proceedings. 11 U.S.C. 

§ 1228(a). Those categories include debts for

alimony and child support; money obtained

through filing false financial statements; debts

for willful and malicious injury to person or

property; debts for death or personal injury

caused by the debtor’s operation of a motor

vehicle while the debtor was intoxicated; and

debts from fraud or defalcation while acting in

a fiduciary capacity, embezzlement or

larceny. The bankruptcy law regarding the

scope of a chapter 12 discharge is complex,

however, and debtors should consult

competent legal counsel in this regard prior to

filing. Those debts which will not be

discharged should be paid in full under a plan.

With respect to secured obligations, those

debts may be paid beyond the end of the plan

payment period and, accordingly, are not

discharged.

CHAPTER 12 HARDSHIP DISCHARGE

The court may grant a “hardship discharge” to

a chapter 12 debtor even though the debtor

has failed to complete plan payments. 11

U.S.C. 

§ 1228(b). Generally, a hardship discharge is

available only to a debtor whose failure to

complete plan payments is due to

circumstances beyond the debtor’s control and

through no fault of the debtor. Creditors must

have received at least as much as they would

have received in a chapter 7 liquidation case,

and the debtor must be unable to modify the

plan. For example, injury or illness that

precludes employment sufficient to fund even

a modified plan may serve as the basis for a

hardship discharge. The hardship discharge

does not apply to any debts that are

nondischargeable in a chapter 7 case. 11

U.S.C. § 523. 

NOTES

1. In North Carolina and Alabama, bankruptcy

administrators perform similar functions that

U.S. trustees perform in the remaining fortyeight states. The bankruptcy administrator

program is administered by the

Administrative Office of the United States

Courts, while the U.S. trustee program is

administered by the Department of Justice.

For purposes of this publication, references to

U.S. trustees are also applicable to bankruptcy

administrators.

2. Section 507 sets forth 10 categories of

unsecured claims which Congress has, for

public policy reasons, given priority of

distribution over other unsecured claims.

3. A fee of $15 is charged for converting a

case under chapter 12 to a case under chapter

7.
50

Chapter 9

Municipality Bankruptcy

The first municipal bankruptcy legislation was

enacted in 1934 during the Great Depression.

Pub. L. No. 251, 48 Stat. 798 (1934). Although

Congress took care to draft the legislation so as

not to interfere with the sovereign powers of the

states guaranteed by the Tenth Amendment to

the Constitution, the Supreme Court held the

1934 Act unconstitutional as an improper

interference with the sovereignty of the states.

Ashton v. Cameron County Water Improvement

Dist. No. 1, 298 U.S. 513, 532 (1936). Congress

enacted a revised Municipal Bankruptcy Act in

1937, Pub. L. No. 302, 50 Stat. 653 (1937),

which was upheld by the Supreme Court.

United States v. Bekins, 304 U.S. 27, 54 (1938).

The law has been amended several times since

1937. In the more than 60 years since Congress

established a federal mechanism for the

resolution of municipal debts, there have been

fewer than 500 municipal bankruptcy petitions

filed. Although chapter 9 cases are rare, a filing

by a large municipality can— like the 1994

filing by Orange County, California—involve

many millions of dollars in municipal debt.

PURPOSE OF MUNICIPAL

BANKRUPTCY

The purpose of chapter 9 is to provide a

financially-distressed municipality protection

from its creditors while it develops and

negotiates a plan for adjusting its debts.

Reorganization of the debts of a municipality is

typically accomplished either by extending debt

maturities, reducing the amount of principal or

interest, or refinancing the debt by obtaining a

new loan. 

Although similar to other chapters in some

respects, chapter 9 is significantly different

in that there is no provision in the law for

liquidation of the assets of the municipality

and distribution of the proceeds to creditors.

Such a liquidation or dissolution would

undoubtedly violate the Tenth Amendment

to the Constitution and the reservation to the

states of sovereignty over their internal

affairs. Indeed, due to the severe limitations

placed upon the power of the bankruptcy

court in chapter 9 cases (required by the

Tenth Amendment and the Supreme Court’s

decisions in cases upholding municipal

bankruptcy legislation), the bankruptcy

court generally is not as active in managing

a municipal bankruptcy case as it is in

corporate reorganizations under chapter 11.

The functions of the bankruptcy court in

chapter 9 cases are generally limited to

approving the petition (if the debtor is

eligible), confirming a plan of debt

adjustment, and ensuring implementation of

the plan. As a practical matter, however, the

municipality may consent to have the court

exercise jurisdiction in many of the

traditional areas of court oversight in

bankruptcy, in order to obtain the protection

of court orders and eliminate the need for

multiple forums to decide issues. 

ELIGIBILITY

Only a “municipality” may file for relief

under chapter 9. 11 U.S.C. § 109(c). The

term “municipality” is defined in the

Bankruptcy Code as a “political subdivision

or public agency or instrumentality of a

State.” 11 U.S.C. § 101(40). The definition

is broad enough to include cities, counties,

townships, school districts, and public

improvement districts. It also includes

revenue-producing bodies that provide
51

services which are paid for by users rather than

by general taxes, such as bridge authorities,

highway authorities, and gas authorities. 

Section 109(c) of the Bankruptcy Codes sets

forth four additional eligibility requirements for

chapter 9:

1. the municipality must be specifically

authorized to be a debtor by State law or

by a governmental officer or

organization empowered by State law to

authorize the municipality to be a

debtor; 

2. the municipality must be insolvent, as

defined in 11 U.S.C. § 101(32)(C); 

3. the municipality must desire to effect

a plan to adjust its debts; and 

4. the municipality must either:

• obtain the agreement of creditors

holding at least a majority in

amount of the claims of each

class that the debtor intends to

impair under a plan in a case

under chapter 9; 

• negotiate in good faith with

creditors and fail to obtain the

agreement of creditors holding

at least a majority in amount of

the claims of each class that the

debtor intends to impair under a

plan;

• be unable to negotiate with

creditors because such

negotiation is impracticable; or

• reasonably believe that a

creditor may attempt to obtain a

preference.

COMMENCEMENT OF THE CASE

Municipalities must voluntarily seek

protection under the Bankruptcy Code. 11

U.S.C. §§ 303, 901(a). They may file a

petition only under chapter 9. A case under

chapter 9 concerning an unincorporated tax

or special assessment district that does not

have its own officials is commenced by the

filing of a voluntary “petition under this

chapter by such district’s governing

authority or the board or body having

authority to levy taxes or assessments to

meet the obligations of such district.” 11

U.S.C. § 921(a). 

A municipal debtor must file a list of

creditors. 11 U.S.C. § 924. Normally, the

debtor files the list of creditors with the

petition. However, the bankruptcy court has

discretion to fix a different time if the debtor

is unable to prepare the list of creditors in

the form and with the detail required by the

Bankruptcy Rules at the time of filing. Fed.

R. Bankr. P. 1007.

ASSIGNMENT OF CASE TO A

BANKRUPTCY JUDGE

One significant difference between chapter

9 cases and cases filed under other chapters

is that the clerk of court does not

automatically assign the case to a particular

judge. “The chief judge of the court of

appeals for the circuit embracing the district

in which the case is commenced

[designates] the bankruptcy judge to

conduct the case.” 11 U.S.C. § 921(b). This

provision was designed to remove politics

from the issue of which judge will preside

over the chapter 9 case of a major

municipality and to ensure that a municipal

case will be handled by a judge who has the

time and capability of doing so.
52

NOTICE OF CASE/OBJECTIONS/ 

ORDER FOR RELIEF 

The Bankruptcy Code requires that notice be

given of the commencement of the case and the

order for relief. 11 U.S.C. § 923. The

Bankruptcy Rules provide that the clerk, or such

other person as the court may direct, is to give

notice. Fed. R. Bankr. P. 2002(f). The notice

must also be published “at least once a week for

three successive weeks in at least one

newspaper of general circulation published

within the district in which the case is

commenced, and in such other newspaper

having a general circulation among bond dealers

and bondholders as the court designates.” 11

U.S.C. § 923. The court typically enters an

order designating who is to give and receive

notice by mail and identifying the newspapers

in which the additional notice is to be published.

Fed. R. Bankr. P. 9007, 9008. 

The Bankruptcy Code permits objections to the

petition. 11 U.S.C. § 921(c). Typically,

objections concern issues like whether

negotiations have been conducted in good faith,

whether the state has authorized the

municipality to file, and whether the petition

was filed in good faith. If an objection to the

petition is filed, the court must hold a hearing

on the objection. Id. The court may dismiss a

petition if it determines that the debtor did not

file the petition in good faith or that the petition

does not meet the requirements of title 11. Id. 

If the petition is not dismissed upon an

objection, the Bankruptcy Code requires the

court to order relief, allowing the case to

proceed under chapter 9. 11 U.S.C. § 921(d).

AUTOMATIC STAY

The automatic stay of section 362 of the

Bankruptcy Code is applicable in chapter 9

cases. 11 U.S.C. §§ 362(a), 901(a). The stay

operates to stop all collection actions

against the debtor and its property upon the

filing of the petition. Additional automatic

stay provisions are applicable in chapter 9

that prohibit actions against officers and

inhabitants of the debtor if the action seeks

to enforce a claim against the debtor. 11

U.S.C. § 922(a). Thus, the stay prohibits a

creditor from bringing a mandamus action

against an officer of a municipality on

account of a prepetition debt. It also

prohibits a creditor from bringing an action

against an inhabitant of the debtor to

enforce a lien on or arising out of taxes or

assessments owed to the debtor. 

Section 922(d) of title 11 limits the

applicability of the stay. Under that section,

a chapter 9 petition does not operate to stay

application of pledged special revenues to

payment of indebtedness secured by such

revenues. Thus, an indenture trustee or other

paying agent may apply pledged funds to

payments coming due or distribute the

pledged funds to bondholders without

violating the automatic stay.

PROOFS OF CLAIM

In a chapter 9 case, the court fixes the time

within which proofs of claim or interest may

be filed. Fed. R. Bankr. P. 3003(c)(3). Many

creditors may not be required to file a proof

of claim in a chapter 9 case. For example, a

proof of claim is deemed filed if it appears

on the list of creditors filed by the debtor,

unless the debt is listed as disputed,

contingent, or unliquidated. 11 U.S.C. 
53

§ 925. Thus, a creditor must file a proof of

claim if the creditor’s claim appears on the list

of creditors as disputed, contingent, or

unliquidated. 

COURT’S LIMITED POWER

Sections 903 and 904 of the Bankruptcy Code

are designed to recognize the court’s limited

power over operations of the debtor. 

Section 904 limits the power of the bankruptcy

court to “interfere with – (1) any of the political

or governmental powers of the debtor; (2) any

of the property or revenues of the debtor; or (3)

the debtor’s use or enjoyment of any incomeproducing property” unless the debtor consents

or the plan so provides. The provision makes it

clear that the debtor’s day-to-day activities are

not subject to court approval and that the debtor

may borrow money without court authority. In

addition, the court cannot appoint a trustee

(except for limited purposes specified in 11

U.S.C. § 926(a)) and cannot convert the case to

a liquidation proceeding. 

The court also cannot interfere with the

operations of the debtor or with the debtor’s use

of its property and revenues. This is due, at least

in part, to the fact that in a chapter 9 case, there

is no property of the estate and thus no estate to

administer. 11 U.S.C. § 902(1). Moreover, a

chapter 9 debtor may employ professionals

without court approval, and the only court

review of fees is in the context of plan

confirmation, when the court determines the

reasonableness of the fees. 

The restrictions imposed by 11 U.S.C. § 904

are necessary to ensure the constitutionality of

chapter 9 and to avoid the possibility that the

court might substitute its control over the

political or governmental affairs or property of

the debtor for that of the state and the

elected officials of the municipality. 

Similarly, 11 U.S.C. § 903 states that

“chapter [9] does not limit or impair the

power of a State to control, by legislation or

otherwise, a municipality of or in such State

in the exercise of the political or

governmental powers of the municipality,

including expenditures for such exercise,”

with two exceptions – a state law

prescribing a method of composition of

municipal debt does not bind any nonconsenting creditor, nor does any judgment

entered under such state law bind a

nonconsenting creditor.

ROLE OF THE U.S.

TRUSTEE/BANKRUPTCY

ADMINISTRATOR

In a chapter 9 case, the role of the U.S.

trustee (or the bankruptcy administrator in

North Carolina or Alabama)1

 is typically

more limited than in chapter 11 cases.

Although the U.S. trustee appoints a

creditors’ committee, the U.S. trustee does

not examine the debtor at a meeting of

creditors (there is no meeting of creditors),

does not have the authority to move for

appointment of a trustee or examiner or for

conversion of the case, and does not

supervise the administration of the case.

Further, the U.S. trustee does not monitor

the financial operations of the debtor or

review the fees of professionals retained in

the case.

ROLE OF CREDITORS

The role of creditors is more limited in

chapter 9 than in other cases. There is no

first meeting of creditors, and creditors may

not propose competing plans. If certain
54

requirements are met, the debtor’s plan is

binding on dissenting creditors. The chapter 9

debtor has more freedom to operate without

court-imposed restrictions. 

In each chapter 9 case, however, there is a

creditors’ committee that has powers and duties

that are very similar to those of a committee in

a chapter 11 case. These powers and duties

include selecting and authorizing the

employment of one or more attorneys,

accountants, or other agents to represent the

committee; consulting with the debtor

concerning administration of the case;

investigating the acts, conduct, assets, liabilities,

and financial condition of the debtor;

participating in the formulation of a plan; and

performing such other services as are in the

interest of those represented. 11 U.S.C. 

§§ 901(a), 1103.

INTERVENTION/RIGHT OF OTHERS

TO BE HEARD

When cities or counties file for relief under

chapter 9, there may be a great deal of interest

in the case from entities wanting to appear and

be heard. The Bankruptcy Rules provide that

“[t]he Secretary of the Treasury of the United

States may, or if requested by the court shall,

intervene in a chapter 9 case.” Fed. R. Bankr. P.

2018(c). Further, “[r]epresentatives of the state

in which the debtor is located may intervene in

a chapter 9 case.” Id. In addition, the

Bankruptcy Code permits the Securities and

Exchange Commission to appear and be heard

on any issue and gives parties in interest the

right to appear and be heard on any issue in a

case. 11 U.S.C. §§ 901(a), 1109. Parties in

interest include municipal employees, local

residents, non-resident owners of real property,

special tax payers, securities firms, and local

banks.

POWERS OF THE DEBTOR

Due to statutory limitations placed upon the

power of the court in a municipal debt

adjustment proceeding, the court is far less

involved in the conduct of a municipal

bankruptcy case (and in the operation of the

municipal entity) while the debtor’s

financial affairs are undergoing

reorganization. The municipal debtor has

broad powers to use its property, raise taxes,

and make expenditures as it sees fit. It is

also permitted to adjust burdensome nondebt contractual relationships under the

power to reject executory contracts and

unexpired leases, subject to court approval,

and it has the same avoiding powers as other

debtors. Municipalities may also reject

collective bargaining agreements and retiree

benefit plans without going through the

usual procedures required in chapter 11

cases. 

A municipality has authority to borrow

money during a chapter 9 case as an

administrative expense. 11 U.S.C. §§ 364,

901(a). This ability is important to the

survival of a municipality that has exhausted

all other resources. A chapter 9 municipality

has the same power to obtain credit as it

does outside of bankruptcy. The court does

not have supervisory authority over the

amount of debt the municipality incurs in its

operation. The municipality may employ

professionals without court approval, and

the professional fees incurred are reviewed

only within the context of plan

confirmation.

DISMISSAL

As previously noted, the court may dismiss

a chapter 9 petition, after notice and a

hearing, if it concludes the debtor did not
55

file the petition in good faith or if the petition

does not meet the requirements of chapter 9. 11

U.S.C. § 921(c). The court may also dismiss the

petition for cause, such as for lack of

prosecution, unreasonable delay by the debtor

that is prejudicial to creditors, failure to propose

or confirm a plan within the time fixed by the

court, material default by the debtor under a

confirmed plan, or termination of a confirmed

plan by reason of the occurrence of a condition

specified in the plan. 11 U.S.C. § 930. 

TREATMENT OF BONDHOLDERS AND

OTHER LENDERS

Different types of bonds receive different

treatment in municipal bankruptcy cases.

General obligation bonds are treated as general

debt in the chapter 9 case. The municipality is

not required to make payments of either

principal or interest on account of such bonds

during the case. The obligations created by

general obligation bonds are subject to

negotiation and possible restructuring under the

plan of adjustment. 

Special revenue bonds, by contrast, will

continue to be secured and serviced during the

pendency of the chapter 9 case through

continuing application and payment of ongoing

special revenues. 11 U.S.C. § 928. Holders of

special revenue bonds can expect to receive

payment on such bonds during the chapter 9

case if special revenues are available. The

application of pledged special revenues to

indebtedness secured by such revenues is not

stayed as long as the pledge is consistent with

11 U.S.C. § 928 [§ 922(d) erroneously refers to

§ 927 rather than § 928], which insures that a

lien of special revenues is subordinate to the

operating expenses of the project or system

from which the revenues are derived. 11 U.S.C.

§ 922(d). 

Bondholders generally do not have to worry

about the threat of preference liability with

respect to any prepetition payments on

account of bonds or notes, whether special

revenue or general obligations. Any transfer

of the municipal debtor’s property to a

noteholder or bondholder on account of a

note or bond cannot be avoided as a

preference, i.e., as an unauthorized payment

to a creditor made while the debtor was

insolvent. 11 U.S.C. § 926(b).

PLAN FOR ADJUSTMENT OF

DEBTS

The Bankruptcy Code provides that the

debtor must file a plan. 11 U.S.C. § 941.

The plan must be filed with the petition or at

such later time as the court fixes. There is

no provision in chapter 9 allowing creditors

or other parties in interest to file a plan. This

limitation is required by the Supreme

Court’s pronouncements in Ashton, 298

U.S. at 528, and Bekins, 304 U.S. at 51,

which interpreted the Tenth Amendment as

requiring that a municipality be left in

control of its governmental affairs during a

chapter 9 case. Neither creditors nor the

court may control the affairs of a

municipality indirectly through the

mechanism of proposing a plan of

adjustment of the municipality’s debts that

would in effect determine the municipality’s

future tax and spending decisions. 

CONFIRMATION STANDARDS

The standards for plan confirmation in

chapter 9 cases are a combination of the

statutory requirements of 11 U.S.C. §

943(b) and those portions of 11 U.S.C. §

1129 (the chapter 11 confirmation

standards) made applicable by 11 U.S.C.

§ 901(a). Section 943(b) lists seven general
56

conditions required for confirmation of a plan.

The court must confirm a plan if the following

conditions are met: 

1. the plan complies with the provisions of title

11 made applicable by sections 103(e) and 901;

2. the plan complies with the provisions of

chapter 9; 

3. all amounts to be paid by the debtor or by any

person for services or expenses in the case or

incident to the plan have been fully disclosed

and are reasonable; 

4. the debtor is not prohibited by law from

taking any action necessary to carry out the

plan; 

5. except to the extent that the holder of a

particular claim has agreed to a different

treatment of such claim, the plan provides that

on the effective date of the plan, each holder of

a claim of a kind specified in section 507(a)(1)

will receive on account of such claim cash equal

to the allowed amount of such claim; 

6. any regulatory or electoral approval

necessary under applicable nonbankruptcy law

in order to carry out any provision of the plan

has been obtained, or such provision is

expressly conditioned on such approval; and 

7. the plan is in the best interests of creditors

and is feasible. 

11 U.S.C. § 943(b). 

Section 943(b)(1) requires as a condition for

confirmation that the plan comply with the

provisions of the Bankruptcy Code made

applicable by sections 103(e) and 901(a) of the

Bankruptcy Code. The most important of these

for purposes of confirming a plan are those

provisions of 11 U.S.C. § 1129 (i.e., 

§ 1129(a)(2), (a)(3), (a)(6), (a)(8), (a)(10))

that are made applicable by 11 U.S.C. §

901(a). Section 1129(a)(8) requires, as a

condition to confirmation, that the plan has

been accepted by each class of claims or

interests impaired under the plan. Therefore,

if the plan proposes treatment for a class of

creditors such that the class is impaired (i.e.,

the creditor’s legal, equitable, or contractual

rights are altered), then that class’s

acceptance is required. If the class is not

impaired, then acceptance by that class is

not required as a condition to confirmation.

Under 11 U.S.C. § 1129(a)(10), the court

may confirm the plan only if, should any

class of claims be impaired under the plan,

at least one impaired class has accepted the

plan. If only one impaired class of creditors

consents to the plan, plan confirmation is

still possible under the “cram down”

provisions of 11 U.S.C. § 1129(b). Under

“cram down,” if all other requirements are

met except the § 1129(a)(8) requirement

that all classes either be unimpaired or have

accepted the plan, then the plan is

confirmable if it does not discriminate

unfairly and is fair and equitable.

The requirement that the plan be in the “best

interests of creditors” means something

different under chapter 9 than under chapter

11. Under chapter 11, a plan is said to be in

the “best interest of creditors” if creditors

would receive as much under the plan as

they would if the debtor were liquidated. 11

U.S.C. § 1129(a)(7)(A)(ii). Obviously, a

different interpretation is needed in chapter

9 cases because a municipality’s assets

cannot be liquidated to pay creditors. In the

chapter 9 context, the “best interests of

creditors” test has generally been interpreted

to mean that the plan must be better than
57

other alternatives available to the creditors. See

6 COLLIER ON BANKRUPTCY § 943.03[7] (15th

ed. rev. 2005). Generally speaking, the

alternative to chapter 9 is dismissal of the case,

permitting every creditor to fend for itself. An

interpretation of the “ best interests of creditors”

test to require that the municipality devote all

resources available to the repayment of creditors

would appear to exceed the standard. The courts

generally apply the test to require a reasonable

effort by the municipal debtor that is a better

alternative for its creditors than dismissal of the

case. Id.

Parties in interest may object to confirmation,

including creditors whose claims are affected by

the plan, an organization of employees of the

debtor, and other tax payers, as well as the

Securities and Exchange Commission. 11

U.S.C. §§ 901(a), 943, 1109, 1128(b).

DISCHARGE

A municipal debtor receives a discharge in a

chapter 9 case after: (1) confirmation of the

plan; (2) deposit by the debtor of any

consideration to be distributed under the plan

with the disbursing agent appointed by the

court; and (3) a determination by the court that

securities deposited with the disbursing agent

will constitute valid legal obligations of the

debtor and that any provision made to pay or

secure payment of such obligations is valid. 11

U.S.C. § 944(b). Thus, the discharge is

conditioned not only upon confirmation, but

also upon deposit of the consideration to be

distributed under the plan and a court

determination of the validity of securities to be

issued.

There are two exceptions to the discharge in

chapter 9 cases. The first is for any debt

excepted from discharge by the plan or order

confirming the plan. The second is for a debt

owed to an entity that, before confirmation

of the plan, had neither notice nor actual

knowledge of the case. 11 U.S.C. § 944(c).

At any time within 180 days after entry of

the confirmation order, the court may, after

notice and a hearing, revoke the order of

confirmation if the order was procured by

fraud. 11 U.S.C. §§ 901(a), 1144.

NOTES

1. In North Carolina and Alabama,

bankruptcy administrators perform similar

functions that United States trustees perform

in the remaining forty-eight states. The

bankruptcy administrator program is

administered by the Administrative Office

of the United States Courts, while the

United States trustee program is

administered by the Department of Justice.

For purposes of this publication, references

to United States trustees are also applicable

to bankruptcy administrators.
58

Chapter 15

Ancillary and Other Cross-Border

Cases

Chapter 15 is a new chapter added to the

Bankruptcy Code by the Bankruptcy Abuse

Prevention and Consumer Protection Act of

2005. It is the U.S. domestic adoption of the

Model Law on Cross-Border Insolvency

promulgated by the United Nations Commission

on International Trade Law (“UNCITRAL”) in

1997, and it replaces section 304 of the

Bankruptcy Code. Because of the UNCITRAL

source for chapter 15, the U.S. interpretation

must be coordinated with the interpretation

given by other countries that have adopted it as

internal law to promote a uniform and

coordinated legal regime for cross-border

insolvency cases.

The purpose of Chapter 15, and the Model Law

on which it is based, is to provide effective

mechanisms for dealing with insolvency cases

involving debtors, assets, claimants and other

parties in interest involving more than one

country. This general purpose is realized

through five objectives specified in the statute:

(1) to promote cooperation between the United

States courts and parties in interest and the

courts and other competent authorities of

foreign countries involved in cross-border

insolvency cases; (2) to establish greater legal

certainty for trade and investment; (3) to

provide for the fair and efficient administration

of cross-border insolvencies that protects the

interests of all creditors and other interested

entities, including the debtor; (4) to afford

protection and maximization of the value of the

debtor’s assets; and (5) to facilitate the rescue of

financially troubled businesses, thereby

protecting investment and preserving

employment. 11 U.S.C. § 1501.

Generally, a chapter 15 case is ancillary to

a primary proceeding brought in another

country, typically the debtor’s home

country. As an alternative, the debtor or a

creditor may commence a full chapter 7 or

chapter 11 case in the United States if the

assets in the United States are sufficiently

complex to merit a full-blown domestic

bankruptcy case. 11 U.S.C. § 1520(c). In

addition, under chapter 15 a U.S. court may

authorize a trustee or other entity (including

an examiner) to act in a foreign country on

behalf of a U.S. bankruptcy estate. 11

U.S.C. § 1505.

An ancillary case is commenced under

chapter 15 by a “foreign representative”

filing a petition for recognition of a “foreign

proceeding.”1

 11 U.S.C. § 1504. Chapter 15

gives the foreign representative the right of

direct access to U.S. courts for this purpose.

11 U.S.C. § 1509. The petition must be

accompanied by documents showing the

existence of the foreign proceeding and the

appointment and authority of the foreign

representative. 11 U.S.C. § 1515. After

notice and a hearing, the court is authorized

to issue an order recognizing the foreign

proceeding as either a “foreign main

proceeding” (a proceeding pending in a

country where the debtor’s center of main

interests are located) or a “foreign non-main

proceeding” (a proceeding pending in a

country where the debtor has an

establishment,2 but not its center of main

interests). 11 U.S.C. § 1517. Immediately

upon the recognition of a foreign main

proceeding, the automatic stay and selected

other provisions of the Bankruptcy Code

take effect within the United States. 11

U.S.C. § 1520. The foreign representative is
59

also authorized to operate the debtor’s business

in the ordinary course. Id. The U.S. court is

authorized to issue preliminary relief as soon as

the petition for recognition is filed. 11 U.S.C. 

§ 1519.

Through the recognition process, chapter 15

operates as the principal door of a foreign

representative to the federal and state courts of

the United States. 11 U.S.C. § 1509. Once

recognized, a foreign representative may seek

additional relief from the bankruptcy court or

from other state and federal courts and is

authorized to bring a full (as opposed to

ancillary) bankruptcy case. 11 U.S.C. §§ 1509,

1511. In addition, the representative is

authorized to participate as a party in interest in

a pending U.S. insolvency case and to intervene

in any other U.S. case where the debtor is a

party. 11 U.S.C. §§ 1512, 1524.

Chapter 15 also gives foreign creditors the right

to participate in U.S. bankruptcy cases and it

prohibits discrimination against foreign

creditors (except certain foreign government

and tax claims, which may be governed by

treaty). 11 U.S.C. § 1513. It also requires notice

to foreign creditors concerning a U.S.

bankruptcy case, including notice of the right to

file claims. 11 U.S.C. § 1514.

One of the most important goals of chapter 15 is

to promote cooperation and communication

between U.S. courts and parties in interest with

foreign courts and parties in interest in crossborder cases. This goal is accomplished by,

among other things, explicitly charging the

court and estate representatives to “cooperate to

the maximum extent possible” with foreign

courts and foreign representatives and

authorizing direct communication between the

court and authorized estate representatives and

the foreign courts and foreign representatives.

11 U.S.C. §§ 1525 - 1527.

If a full bankruptcy case is initiated by a

foreign representative (when there is a

foreign main proceeding pending in another

country), bankruptcy court jurisdiction is

generally limited to the debtor’s assets that

are located in the United States. 11 U.S.C. 

§ 1528. The limitation promotes

cooperation with the foreign main

proceeding by limiting the assets subject to

U.S. jurisdiction, so as not to interfere with

the foreign main proceeding. Chapter 15

also provides rules to further cooperation

where a case was filed under the

Bankruptcy Code prior to recognition of the

foreign representative and for coordination

of more than on foreign proceeding. 11

U.S.C. §§ 1529 - 1530.

The UNCITRAL Model Law has also been

adopted (with certain variations) in Canada,

Mexico, Japan and several other countries.

Adoption is pending in the United Kingdom

and Australia, as well as other countries

with significant international economic

interests. 

NOTES

1. A “foreign proceeding” is a “judicial or

administrative proceeding in a foreign

country ... under a law relating to insolvency

or adjustment of debt in which proceeding

the [debtor’s assets and affairs] are subject

to control or supervision by a foreign court

for the purpose of reorganization or

liquidation.” 11 U.S.C. § 101(23). A

“foreign representative” is the person or

entity authorized in the foreign proceeding

“to administer the reorganization or

liquidation of the debtor’s assets or affairs

or to act as a representative of such foreign

proceeding.”
60

2. An establishment is a place of operations

where the debtor carries out a long term

economic activity. 11 U.S.C. § 1502(2). 
61

Servicemembers’ Civil

Relief Act

BACKGROUND

The Servicemembers’ Civil Relief Act

(“SCRA”) is found at 50 U.S.C. app. §§ 501 et

seq. The purpose of the SCRA is strengthen and

expedite national defense by giving

servicemembers certain protections in civil

actions. By providing for the temporary

suspension of judicial and administrative

proceedings and transactions that may adversely

affect servicemembers during their military

service, the SCRA enables servicemembers to

focus their energy on the defense of the United

States. Among other things, the SCRA allows

for forbearance and reduced interest on certain

obligations incurred prior to military service,

and it restricts default judgments against

servicemembers and rental evictions of

servicemembers and all their dependents. The

SCRA applies to all members of the United

States military on active duty, and to U.S.

citizens serving in the military of United States

allies in the prosecution of a war or military

action. The provisions of the SCRA generally

end when a servicemember is discharged from

active duty or within 90 days of discharge, or

when the servicemember dies. Portions of the

SCRA also apply to reservists and inductees

who have received orders but not yet reported to

active duty or induction into the military

service.

GENERAL PROVISIONS

There are three primary areas of coverage

under the SCRA: (1) protection against the

entry of default judgments; (2) stay of

proceedings where the servicemember has

notice of the proceeding; and (3) stay or

vacation of execution of judgments,

attachments and garnishments. 50 U.S.C.

app. §§ 521, 522 and 524. 

Protection Against Default Judgements

Section 521 of the SCRA establishes certain

procedures that must be followed in all civil

proceedings in order to protect

servicemember defendants against the entry

of default judgements. These procedures are

outlined below:

• If a defendant is in default for

failure to appear in the action filed

by the plaintiff, the plaintiff must

file an affidavit1

 with the court

before a default judgment may be

entered. The affidavit must state

whether the defendant is in the

military, or that the plaintiff was

unable to determine whether the

defendant is in the military.

• If, based on the filed affidavits, the

court cannot determine whether the

defendant is in the military, it may

condition entry of judgment against

the defendant upon the plaintiff’s

filing of a bond. The bond would

indemnify the defendant against any

loss or damage incurred because of

the judgment if the judgment is later

set aside in whole or in part. 

• The court may not order entry of

judgment against the defendant if

the defendant is in the military until

after the court appoints an attorney

to represent the defendant. 

• If requested by counsel for a

servicemember defendant, or upon

the court’s own motion, the court
62

will grant a stay of proceedings for no

less than 90 days if it determines that (1)

there may be a defense and the defense

cannot be presented without the

defendant’s presence; or (2) after due

diligence the defendant’s attorney has

not been able to contact the defendant or

otherwise determine if a meritorious

defense exists.

• The court may, in its discretion, make

further orders or enter further judgments

to protect the rights of the defendant

under the SCRA.

• If a judgment is entered against the

defendant while he or she is in military

service or within 60 days of discharge

from military service, and the defendant

was prejudiced in making his or her

defense because of his or her military

service, the judgment may, upon

application by the defendant, be opened

by the court and the defendant may then

provide a defense. Before the judgment

may be opened, however, the defendant

must show that he or she has a

meritorious or legal defense to some or

all of the action.

Stay of Proceedings Where Servicemember Has

Notice

Outside the default context, and at any time

before final judgement in a civil action, a person

covered by the SCRA who has received notice

of a proceeding may ask the court to stay the

proceeding. 50 U.S.C. app. § 522. The court

may also order a stay on its own motion. Id. The

court will grant the servicemember’s stay

application and will stay the proceeding for at

least 90 days if the application includes: (1) a

letter or other communication setting forth facts

demonstrating that the individual’s current

military duty requirements materially affect

the servicemember’s ability to appear along

with a date when the servicemember will be

able to appear; and (2) a letter or other

communication from the servicemember’s

commanding officer stating that the

servicemember’s current military duty

prevents his or her appearance and that

military leave is not authorized for the

servicemember at the time of the letter. The

court has discretion to grant additional stays

upon further application. 

Stay or Vacation of Execution of

Judgements, Attachments and Garnishments

In addition to the court’s ability to regulate

default judgments and stay proceedings, the

court may on its own motion and must upon

application: (1) stay the execution of any

judgment or order entered against a

servicemember; and (2) vacate or stay any

attachment or garnishment of the

servicemember’s property or assets, whether

before or after judgment if it finds that the

servicemember’s ability to comply with the

judgment or garnishment is materially

affected by military service. 50 U.S.C. app.

§ 524. The stay of execution may be ordered

for any part of the servicemember’s military

service plus 90 days after discharge from

the service. The court may also order the

servicemember to make installment

payments during any stay ordered.

Additional Protections

Several additional rights are available under

the SCRA. For example, when an action for

compliance with a contract is stayed under

the SCRA, contractual penalties do not

accrue during the period of the stay. 50

U.S.C. app. § 523. The SCRA also provides

in most instances that a landlord cannot
63

evict a servicemember or dependants from a

primary residence without a court order. In an

eviction proceeding, the court may also adjust

the lease obligations to protect the interests of

the parties. 50 U.S.C. app. § 531. If the court

stay the eviction proceeding, it may provide

equitable relief to the landlord by ordering

garnishment of a portion of the

servicemember’s pay. Id. Under the SCRA a

servicemember may terminate residential and

automotive leases if he or she is transferred after

the lease is made. 50 U.S.C. app. § 535. A court

may also extend some of the protections

afforded a servicemember under the SCRA to

persons co-liable or secondarily liable on the

servicemember’s obligation. 50 U.S.C. app. §

513.

APPLICABILITY TO BANKRUPTCY

PROCEEDINGS

The language of the SCRA states that it is

generally applicable in any action or proceeding

commenced in any court. 50 U.S.C. app. §§

521, 522 and 524. Therefore, absent

contravening language with respect to

bankruptcy proceedings, the SCRA applies to

all actions or proceedings before a bankruptcy

court. 

The applicability of the SCRA in bankruptcy

proceedings is also evident in the Federal Rules

of Civil Procedure and the Federal Rules of

Bankruptcy Procedure. For example, the

advisory committee note to Federal Rule for

default judgments, Fed. R. Civ. P. 55(b), states

that it is directly affected by the SCRA.2

 Under

Fed. R. Bankr. P. 7055 and 9014 of the Federal

Rules of Bankruptcy Procedure, Fed. R. Civ. P.

55 is applicable in bankruptcy adversary

proceedings and contested matters. Thus, the

default judgment protections of the SCRA

clearly apply in bankruptcy cases.

The bankruptcy court clerk’s office is aware

of the requirement that the plaintiff must

provide an affidavit stating whether the

defendant is in the military before default

may be entered against the defendant.

Bankruptcy Procedural Forms B260,

B261A, and B261B, and their

accompanying instructions, provide

additional guidance concerning the

applicability of the SCRA to default

judgments and related procedural

requirements.

NOTES

1. The requirement for an affidavit may be

satisfied by a statement, declaration,

verification, or certificate in writing

subscribed and certified or declared to be

true under penalty of perjury. 50 U.S.C. app.

§ 521(4). 

2. The advisory committee note to Fed. R.

Civ. P. 55 comments on the applicability of

the Servicemembers’ Civil Relief Act

(formally known as the Soldiers’ and

Sailors’ Civil Relief Act of 1940) to default

judgements as follows:

The operation of Rule 55(b) (Judgment) is

directly affected by the Soldiers’ and

Sailors’ Civil Relief Act of 1940, 50 U.S.C.

Appendix, § 501 et seq. Section 200 of the

Act [50 U.S.C. Appendix, § 520] imposes

specific requirements which must be

fulfilled before a default judgment can be

entered, e.g., Ledwith v. Storkan,

D.Neb.1942, 6 Fed. Rules Serv. 60b.24,

Case 2, 2 F.R.D. 539, and also provides for

the vacation of a judgment in certain

circumstances. See discussion in

Commentary, Effect of Conscription

Legislation on the Federal Rules, 1940, 3
64

Fed. Rules Serv. 725; 3 Moore’s Federal

Practice, 1938, Cum. Supplement § 55.02.
65

Securities Investor

Protection Act

OVERVIEW

Typically, when a brokerage firm fails, the

Securities Investor Protection Corporation

(“SIPC”) arranges the transfer of the failed

brokerage’s accounts to a different securities

brokerage firm. If the SIPC is unable to arrange

the accounts’ transfer, the failed firm is

liquidated. In that case, the SIPC sends

investors either certificates for the stock that

was lost or a check for the market value of the

shares. 

Although the Bankruptcy Code provides for a

stockbroker liquidation proceeding, 11 U.S.C. 

§ 741 et seq., it is far more likely that a failing

brokerage will find itself involved in a

proceeding under the Securities Investor

Protection Act of 1970 (“SIPA”) (15 U.S.C. 

§§ 78aaa et seq.), rather than a Bankruptcy

Code liquidation case. Brokerage firms may be

liquidated under the Bankruptcy Code,

however, if the SIPC does not file an

application for a protective decree with the

district court or if the district court finds that

customers of the brokerage firm are not in need

of protection under the SIPA. 15 U.S.C.

§§ 78eee.

HISTORY

Before 1938, little protection existed for

customers of a bankrupt stockbroker unless they

could trace cash and securities held by failed

stockbrokers. In 1938 Congress enacted section

60(e) of the Bankruptcy Act creating a single

and separate fund concept to minimize losses to

customers by giving them priority over claims

of general creditors. 1898 Bankruptcy Act

§ 60(e)(2) (repealed). Because the fund was

normally inadequate, however, customer

losses continued.

Following a period of great expansion in the

securities industry during the 1960's, a

serious business contraction hit the industry

in 1969-1970. This situation led to

voluntary liquidations, mergers,

receiverships, and bankruptcies of a

substantial number of brokerage houses.

Annotation, Validity, Construction, and

Application of Securities Investor

Protection Act of 1970, 23 A.L.R. Fed. 157,

179 (1975). The cash and securities

customers that had deposited with these

failed firms were dissipated or tied up in

lengthy bankruptcy proceedings. In addition

to mounting customer losses and the

subsequent erosion of investor confidence,

the Congress was concerned with a possible

“domino effect” involving otherwise solvent

brokers that had substantial open

transactions with firms that failed. 

Congress enacted the SIPA in reaction to

this growing concern. The goal was to

prevent the failure of more brokerage

houses, restore investor confidence in the

capital markets, and upgrade the financial

responsibility requirements for registered

brokers and dealers. Securities Investor

Protection Corp. v. Barbour, 421 U.S. 412,

414 (1975). Congress designed the SIPA to

apportion responsibility for carrying out the

various goals of the legislation to several

groups. Among them are the Securities and

Exchange Commission (hereinafter referred

to as SEC), various securities industry selfregulatory organizations, and the SIPC. The

SIPA was designed to create a new form of

liquidation proceeding. It is applicable only

to member firms and was designed to

accomplish the completion of open
66

transactions and the speedy return of most

customer property. Id.

SIPA

The SIPA is codified in Title 15 of the United

States Code at Sections 78aaa - 111. The SIPA

created the SIPC, a nonprofit, private

membership corporation to which most

registered brokers and dealers are required to

belong. 15 U.S.C. § 78ccc. The SIPC fund,

which constitutes an insurance program, is

authorized under 15 U.S.C. § 78ddd(a), and

assessments against members are authorized by

15 U.S.C. §§ 78ddd(c) and (d). The fund is

designed to protect the customers of brokers or

dealers subject to the SIPA from loss in case of

financial failure of the member. The fund is

supported by assessments upon its members. If

the fund should become inadequate, the SIPA

authorizes borrowing against the U.S. Treasury.

An analogy could be made to the role of the

Federal Deposit Insurance Corporation in the

banking industry.

 

BANKRUPTCY LIQUIDATION VERSUS

THE SIPA LIQUIDATION IN

BANKRUPTCY COURT

The essential difference between a liquidation

under the Bankruptcy Code and one under the

SIPA is that under the Bankruptcy Code the

trustee is charged with converting securities to

cash as quickly as possible and, with the

exception of the delivery of customer name

securities, making cash distributions to

customers of the debtor in satisfaction of their

claims. A SIPC trustee, on the other hand, is

required to distribute securities to customers to

the greatest extent practicable in satisfaction of

their claims against the debtor. 

There is a fundamental difference in orientation

between the two proceedings. There is a

statutory grant of authority to a SIPC trustee

to purchase securities to satisfy customer net

equity claims to specified securities. 15

U.S.C. §78fff-2(d). The trustee is required

to return customer name securities to

customers of the debtor (15 U.S.C. § 78fff2(c)(2)), distribute the fund of “customer

property” ratably to customers (15 U.S.C.

§ 78fff-2(b)), and pay, with money from the

SIPC fund, remaining customer net equity

claims, to the extent provided by the Act

(15 U.S.C. §§ 78fff-2(b) and 3(a)). A trustee

operating under the Bankruptcy Code lacks

similar resources. The Code seeks to protect

the filing date value of a customer’s

securities account by liquidating all noncustomer name securities. SIPA seeks to

preserve an investor’s portfolio as it stood

on the filing date. Under SIPA, the customer

will receive securities whenever possible. 

ROLE OF THE DISTRICT COURT

15 U.S.C. § 78eee(a)(3)(A) provides that the

SIPC may file an application for a

protective decree with the U.S. district court

if the SIPC determines that any member has

failed or is in danger of failing to meet

obligations to customers and meets one of

the four conditions specified in 15 U.S.C.

§ 78eee(b)(1). This application is filed as a

civil case in which the SIPC or the SEC or

both are named as plaintiff, and the member

securities firm is named as the debtordefendant. In the event that the SIPC refuses

to act under the SIPA, the SEC may apply to

the U.S. District Court for the District of

Columbia to require the SIPC to discharge

its obligations under the SIPA. 15 U.S.C.

§ 78ggg(b). By contrast, customers of

failing broker-dealers do not have an

implied right of action under the SIPA to

compel the SIPC to exercise its statutory

authority for their benefit. Barbour,421 U.S.
67

at 425. Upon the filing of an application, the

district court has exclusive jurisdiction of the

debtor-defendant and its property.

The institution of a case under the SIPA brings

a pending bankruptcy liquidation to a halt.

Irrespective of the automatic stay, the SIPC may

file an application for a protective decree under

SIPA. 11 U.S.C. § 742; 15 U.S.C. § 78aaa et

seq. The filing stays all proceedings in the

bankruptcy case until the SIPC action is

completed. Id. Pending issuance of a protective

decree, the district court:

[i.] shall stay any pending bankruptcy,

mortgage foreclosure, equity

receivership, or other proceeding to

reorganize, conserve, or liquidate the

debtor or its property and any other suit

against any receiver, conservator, or

trustee of the debtor or its property, and

shall continue such stay upon

appointment of a trustee ... 

[ii.] may stay any proceeding to enforce

a lien against property of the debtor or

any other suit against the debtor,

including a suit by stockholders of the

debtor which interferes with prosecution

by the trustee of claims against former

directors, officers, or employees of the

debtor, and may continue such stay upon

appointment of a trustee ... 

[iii.] may stay enforcement of, and upon

appointment of a trustee ... [if a

protective decree is issued] ... may

continue the stay for such period of time

as may be appropriate, but shall not

abrogate any right of setoff, except to the

extent such right may be affected under

section 553 of Title 11, ... and shall not

abrogate the right to enforce a valid,

nonpreferential lien or pledge against

the property of the debtor; and 

[iv.] may appoint a temporary

receiver.

15 U.S.C. § 78eee(b)(2)(B)(I - iv) (emphasis

added).

In addition, upon the filing of a SIPC

application, 11 U.S.C. § 362 comes into

effect.

The SIPA provides that the district court

will issue a protective decree if the debtor

consents, the debtor fails to contest the

application for a protective decree, or the

district court finds that one of the conditions

specified in 15 U.S.C. § 78eee(b)(1) exist. If

the court issues a protective decree, then the

court will appoint a trustee and an attorney

for the trustee whom the SIPC, in its sole

discretion, specifies. 15 U.S.C.

§ 78eee(b)(3). Upon the issuance of a

protective decree and appointment of a

trustee, or a trustee and counsel, the district

court will order the removal of the entire

liquidation proceeding to the bankruptcy

court in the same judicial district. 15 U.S.C.

§ 78eee(b)(4). 

REMOVAL TO BANKRUPTCY

COURT

The case is removed to the bankruptcy court

as an adversary proceeding for liquidation.

No filing or removal fee is charged. The

reason for using an adversary proceeding

number is historical. Although the SIPA

proceedings are not bankruptcy cases, by

law certain procedures prescribed in

chapters 1, 3, and 5, and subchapters I and II

of chapter 7 of Title 11 of the U.S. Code are

applicable in SIPA proceedings. In addition,
68

there is no related bankruptcy case number.

Statistical reports to the Administrative Office

should repeat the adversary number so that the

Statistics Division will know it is a SIPA

matter. Forms B111A (Adversary Proceeding

Opening Report) and B111B (Adversary

Proceeding Closing Report) should be used

since this is an adversary proceeding. For

adversary proceedings within the adversary

SIPA proceeding, the clerk’s office should use

the original adversary proceeding number for

the related case number.

The SIPA requires that the bankruptcy court

hold a hearing with 10 days notice to customers,

creditors, and stockholders on the

disinterestedness of the trustee or attorney for

the trustee. 15 U.S.C. § 78eee(b)(6)(B). At the

hearing, the court will entertain grounds for

objection to the retention of the trustee or

attorney for the trustee including, among other

things, insider considerations. 15 U.S.C.

§ 78eee(b)(6)(A). If SIPC appoints itself as

trustee, it should be deemed disinterested, and

where a SIPC employee has been specified, the

employee can not be disqualified solely because

of his employment. Id. Neither the Bankruptcy

Code, Bankruptcy Rules, nor SIPA provide for

U.S. trustee or bankruptcy administrator

involvement.

The SIPA provides for noticing of both

customers and creditors. The noticing

requirements provided for in 15 U.S.C. § 78fff2(a)(1) are performed by the trustee, not the

clerk of the bankruptcy court. While the SIPA

does not require a formal proof of claim for

customers (other than certain insiders and their

relatives), it does require a written statement of

claim. The trustee will normally provide

customers with claim forms and instructions.

The claim form must be filed with the trustee

rather than the clerk of the bankruptcy court. 15

U.S.C. § 78fff-2(a)(2). With limited, specified

exceptions, no claim of a customer or other

creditor can be allowed unless it is received

by the trustee within six months after the

initial publication of notice. 15 U.S.C. §

78fff-2(a)(3).

LIQUIDATION PROCEEDINGS

The purposes of a SIPA liquidation are: (1)

to deliver customer name securities to or on

behalf of customers; (2) to distribute

customer property and otherwise satisfy net

equity claims of customers; (3) to sell or

transfer offices and other productive units of

the debtor’s business; (4) to enforce the

rights of subrogation; and (5) to liquidate

the business as promptly as possible. 15

U.S.C. § 78fff(a). To the extent possible,

consistent with SIPA, the liquidation is

conducted in accordance with chapters 1, 3,

5 and subchapters I and II of chapter 7 of

Title 11. 15 U.S.C. § 78fff(b). A section 341

meeting of creditors is conducted by the

trustee. Noncustomer claims are handled as

in an asset case. Costs and expenses, and

priorities of distribution from the estate, are

allowed as provided in section 726 of Title

11. Funds advanced by SIPC to the trustee

for costs and expenses are recouped from

the estate, to the extent there is any estate.

11 U.S.C. § 507.

POWERS OF THE TRUSTEE

The powers of the trustee in a SIPC case are

essentially the same as those vested in a

chapter 7 trustee appointed under Title 11.

“In addition, a trustee may, with the

approval of SIPC but without any need for

court approval:

(1) hire and fix the compensation of all

personnel (including officers and

employees of the debtor and of its
69

examining authority) and other persons

(including accountants) that are deemed by

the trustee necessary for all or any purposes

of the liquidation proceeding;

(2) utilize SIPC employees for all or any

purposes of a liquidation proceeding; and

(3) margin and maintain customer accounts

of the debtor . . .”

15 U.S.C. § 78fff-1(a).

A SIPC trustee may reduce to money customer

securities constituting customer property or in

the general estate of the debtor. 15 U.S.C.

§ 78fff-1(b). The trustee must, however, deliver

securities to customers to the maximum extent

practicable. 15 U.S.C. § 78fff-1(b)(1). Subject

to prior approval of SIPC, but again without any

need for court approval, the trustee may also

pay or guarantee any part of the debtor’s

indebtedness to a bank, person, or other lender

when certain conditions exist. 15 U.S.C. § 78fff1(b)(2).

The trustee is responsible for investigating the

acts, conduct, and condition of the debtor and

reporting thereon to the court. 15 U.S.C.

§ 78fff-1(d)(1). The trustee must also provide a

statement on the investigation to SIPC and to

other persons as the court might direct. 15

U.S.C. § 78fff-1(d)(4). Moreover, the trustee

must make periodic reports to the court and to

SIPC on the progress of distribution of cash and

securities to customers. 15 U.S.C. § 78fff-1(c).

CLAIMS

Upon receipt of a written statement of claim, the

trustee promptly discharges obligations of the

debtor relating to cash and securities by

delivering securities or making payments to or

on behalf of the customer insofar as such

obligations are ascertainable from books

and records of the debtor, or are otherwise

established to the satisfaction of the trustee.

The value of securities delivered in this

regard are calculated as of the close of

business on the filing date. 15 U.S.C.

§ 78fff-2(b).

The court must authorize the trustee to

satisfy claims out of monies advanced by

SIPC for this purpose, notwithstanding that

the estate may not have sufficient funds for

such payment. 15 U.S.C. § 78fff-2(b)(1).

The court is generally not involved in the

process except to the extent that a dispute

arises between the trustee and customers

regarding specific claims. Simple objections

stay with the initial adversary proceeding.

Occasionally, however, significant litigation

arises in this area which generates related

actions in the form of additional adversary

proceedings.

DISTRIBUTION

Customer related property of the debtor is

allocated in the following order:

(1), to SIPC in repayment of advances

made to the extent they were used to recover

securities apportioned to customer property;

(2), to customers of the debtor on the

basis of their net equities;

(3), to SIPC as subrogee for the claims

of customers; and

(4), to SIPC in repayment of advances

made by SIPC to transfer or sell customer

accounts to another SIPC member firm.

15 U.S.C. § 78fff-2(c)(1).
70

The trustee must deliver customer name

securities to the customer if the customer is not

indebted to the debtor. If indebted, the customer

may, with the approval of the trustee, reclaim

securities in his or her name upon payment to

the trustee of all such indebtedness. 15 U.S.C. 

§ 78fff-2(c)(2).

The trustee may, with the approval of the SIPC,

sell or otherwise transfer to another member of

the SIPC, without consent of any customer, all

or any part of the account of a customer.

15 U.S.C. § 78fff-2(f). The trustee may also

enter into any agreement, and the SIPC will

advance funds as necessary, to indemnify the

member firm against shortages of cash or

securities in customer accounts sold or

transferred. 15 U.S.C. § 78fff-2(f)(2). In

addition, the trustee may purchase securities in

a fair and orderly market in order to deliver

securities to customers in satisfaction of their

claims. 15 U.S.C. § 78fff-2(d).

To the extent customer property and the SIPC

advances are not sufficient to pay or satisfy in

full the net equity claims of customers, then

customers are entitled to participate in the estate

as unsecured creditors. 15 U.S.C. § 78fff2(c)(1).

ADVANCES

The law requires that SIPC make advances to

the trustee in order to satisfy claims and

otherwise liquidate the business. These

advances are made to satisfy customer claims in

cash, to purchase securities to satisfy net equity

claims in lieu of cash, and to pay all necessary

costs and expenses of administration and

liquidation of the estate to the extent the estate

of the debtor is insufficient to pay said costs and

expenses. Any amount advanced in satisfaction

of customer claims may not exceed $500,000

per customer. 15 U.S.C. § 78fff-3(a). If part of

the claim is for cash, the total amount

advanced for cash payment must not exceed

$100,000. 15 U.S.C. § 78fff-3(a)(1). The

difference between cash payments and the

maximum amount allowed can be satisfied

by the delivery of securities, or cash in lieu

of securities.

DIRECT PAYMENT UNDER SIPA

OUTSIDE THE BANKRUPTCY

COURT

In certain situations, the SIPC may elect to

utilize a direct payment procedure to the

customers of a debtor, thereby avoiding a

trustee and the courts. Certain preconditions

must exist. The claims of all customers must

aggregate less than $250,000, the debtor

must be financially distressed as defined in

the law, and the cost to the SIPC for direct

payment process must be less than for

liquidation through the courts. 15 U.S.C. 

§ 78fff-4(a). 

If direct payment is utilized, the entire

proceeding remains outside the court. The

process remains essentially a transaction

between the SIPC and the debtor’s

customers.

Although the SIPA provides for a direct

payment procedure in lieu of instituting a

liquidation proceeding, the bankruptcy court

may still become involved in disputes

regarding the direct payment procedure. A

person aggrieved by a SIPC determination

with respect to a claim in a direct payment

procedure may, within six months following

mailing of a SIPC determination, seek a

final adjudication of such claim by the

court. 15 U.S.C. § 78fff-4(e). The courts

having jurisdiction over cases under Title 11

have original and exclusive jurisdiction of

any civil action for the adjudication of such
71

claims. The action is to be brought in the

judicial district where the head office of the

debtor is located. It would be brought as an

adversary proceeding in the bankruptcy court

even though there is no main case.

ROLE OF SECURITIES AND

EXCHANGE COMMISSION

The SEC is responsible for regulating and

supervising the activities of the SIPC. The SEC

promulgates operating rules that establish the

role of self-regulatory organizations and

examining authorities, and their reporting

responsibilities to the SIPC of inspections and

reviews of its member firms. The SIPC’s

member firms are also required to provide

information and documentation as necessary to

assist in accomplishing these inspections. The

penalties for fraud, deceit, or withholding of

information throughout the processes covered

by this law are severe. 15 U.S.C. § 78jjj(c).

COMPENSATION IN A SIPA ACTION

The SIPA specifies that the bankruptcy court

must grant reasonable compensation for the

services and expenses of the trustee and the

attorney for the trustee. Interim allowances are

also permitted. 15 U.S.C. § 78eee(b)(5)(A). Any

person seeking allowances must file an

application complying in form and content with

provisions in Title 11, and must also serve a

copy on the debtor, SIPC, creditors and other

persons the court may designate. The court is

required to fix a time for a hearing on the

application. Notice need not be given to

customers whose claims have been or will be

paid in full or creditors who cannot reasonably

be expected to receive any distribution. 15

U.S.C. § 78eee(b)(5)(B).

The SIPC will review the application and file its

recommendation with respect to such

allowances prior to the hearing on the

application. In any case where the

allowances are to be paid by SIPC without

reasonable expectation of recoupment and

there is no difference between the amount

applied for and the amount recommended

by SIPC, the bankruptcy court must award

that amount. 15 U.S.C. § 78eee(b)(5)(C). If

there is a difference, the court must, among

other considerations, place considerable

reliance on the recommendation of SIPC. If

the estate is insufficient to cover these

awards as costs of administration, 15 U.S.C.

§ 78eee(b)(5)(E) provides that SIPC will

advance the necessary funds to cover the

costs.
72

Bankruptcy Terminology

Most debtors who file a bankruptcy petition,

and many of their creditors, know very little

about the bankruptcy process. Bankruptcy

Basics is designed to provide debtors, creditors,

judiciary employees, and the general public

with a basic explanation of bankruptcy and how

it works. This glossary of bankruptcy

terminology explains, in layman’s terms, many

of the legal terms that are used in cases filed

under the Bankruptcy Code.

adversary proceeding A lawsuit arising in or

related to a bankruptcy case that is commenced

by filing a complaint with the court. A

nonexclusive list of adversary proceedings is set

forth in Fed. R. Bankr. P. 7001.

assume An agreement to continue performing

duties under a contract or lease.

automatic stay An injunction that

automatically stops lawsuits, foreclosures,

garnishments, and all collection activity against

the debtor the moment a bankruptcy petition is

filed.

bankruptcy A legal procedure for dealing with

debt problems of individuals and businesses;

specifically, a case filed under one of the

chapters of title 11 of the United States Code

(the Bankruptcy Code).

bankruptcy administrator An officer of the

judiciary serving in the judicial districts of

Alabama and North Carolina who, like the U.S.

trustee, is responsible for supervising the

administration of bankruptcy cases, estates, and

trustees; monitoring plans and disclosure

statements; monitoring creditors’ committees;

monitoring fee applications; and performing

other statutory duties. Compare U.S. trustee.

Bankruptcy Code The informal name for

title 11 of the United States Code (11 U.S.C.

§§ 101-1330), the federal bankruptcy law.

bankruptcy court The bankruptcy judges

in regular active service in each federal

judicial district; a unit of the district court.

bankruptcy estate All legal or equitable

interests of the debtor in property at the time

of the bankruptcy filing. (The estate

includes all property in which the debtor has

an interest, even if it is owned or held by

another person.)

bankruptcy judge A judicial officer of the

United States district court who is the court

official with decision-making power over

federal bankruptcy cases.

bankruptcy petition The document filed by

the debtor (in a voluntary case) or by

creditors (in an involuntary case) by which

opens the bankruptcy case. (There are

official forms for bankruptcy petitions.)

chapter 7 The chapter of the Bankruptcy

Code providing for “liquidation” (i.e., the

sale of a debtor’s nonexempt property and

the distribution of the proceeds to creditors).

chapter 9 The chapter of the Bankruptcy

Code providing for reorganization of

municipalities (which includes cities and

towns, as well as villages, counties, taxing

districts, municipal utilities, and school

districts).

chapter 11 The chapter of the Bankruptcy

Code providing (generally) for

reorganization, usually involving a

corporation or partnership. (A chapter 11

debtor usually proposes a plan of
73

reorganization to keep its business alive and pay

creditors over time. People in business or

individuals can also seek relief in chapter 11.)

chapter 12 The chapter of the Bankruptcy Code

providing for adjustment of debts of a “family

farmer,” or a “family fisherman” as those terms

are defined in the Bankruptcy Code.

chapter 13 The chapter of the Bankruptcy Code

providing for adjustment of debts of an

individual with regular income. (Chapter 13

allows a debtor to keep property and pay debts

over time, usually three to five years.)

chapter 15 The chapter of the Bankruptcy

Code dealing with cases of cross-border

insolvency.

claim A creditor’s assertion of a right to

payment from the debtor or the debtor’s

property.

confirmation Bankruptcy judges’s approval of

a plan of reorganization or liquidation in chapter

11, or payment plan in chapter 12 or 13.

consumer debtor A debtor whose debts are

primarily consumer debts.

consumer debts Debts incurred for personal,

as opposed to business, needs.

contested matter Those matters, other than

objections to claims, that are disputed but are

not within the definition of adversary

proceeding contained in Rule 7001.

contingent claim A claim that may be owed by

the debtor under certain circumstances, e.g.,

where the debtor is a cosigner on another

person’s loan and that person fails to pay.

creditor One to whom the debtor owes

money or who claims to be owed money by

the debtor.

credit counseling Generally refers to two

events in individual bankruptcy cases: (1)

the “individual or group briefing” from a

nonprofit budget and credit counseling

agency that individual debtors must attend

prior to filing under any chapter of the

Bankruptcy Code; and (2) the “instructional

course in personal financial management” in

chapters 7 and 13 that an individual debtor

must complete before a discharge is entered.

There are exceptions to both requirements

for certain categories of debtors, exigent

circumstances, or if the U.S. trustee or

bankruptcy administrator have determined

that there are insufficient approved credit

counseling agencies available to provide the

necessary counseling.

creditors’ meeting see 341 meeting

current monthly income The average

monthly income received by the debtor over

the six calendar months before

commencement of the bankruptcy case,

including regular contributions to household

expenses from nondebtors and income from

the debtor’s spouse if the petition is a joint

petition, but not including social security

income and certain other payments made

because the debtor is the victim of certain

crimes. 11 U.S.C. § 101(10A).

debtor A person who has filed a petition for

relief under the Bankruptcy Code.

debtor education see credit counseling

defendant An individual (or business)

against whom a lawsuit is filed.
74

discharge A release of a debtor from personal

liability for certain dischargeable debts set forth

in the Bankruptcy Code. (A discharge releases

a debtor from personal liability for certain debts

known as dischargeable debts and prevents the

creditors owed those debts from taking any

action against the debtor to collect the debts.

The discharge also prohibits creditors from

communicating with the debtor regarding the

debt, including telephone calls, letters, and

personal contact.)

dischargeable debt A debt for which the

Bankruptcy Code allows the debtor’s personal

liability to be eliminated.

disclosure statement A written document

prepared by a chapter 11 debtor or other plan

proponent designed to provide “adequate

information” to creditors to enable them to

evaluate the chapter 11 plan of reorganization.

equity The value of a debtor’s interest in

property that remains after liens and other

creditors’ interests are considered. (Example: If

a house valued at $100,000 is subject to a

$80,000 mortgage, there is $20,000 of equity.)

executory contract or lease Generally includes

contracts or leases under which both parties to

the agreement have duties remaining to be

performed. (If a contract or lease is executory,

a debtor may assume it or reject it.)

exemptions, exempt property Certain property

owned by an individual debtor that the

Bankruptcy Code or applicable state law

permits the debtor to keep from unsecured

creditors. For example, in some states the debtor

may be able to exempt all or a portion of the

equity in the debtor’s primary residence

(homestead exemption), or some or all “tools of

the trade” used by the debtor to make a living

(i.e., auto tools for an auto mechanic or dental

tools for a dentist). The availability and

amount of property the debtor may exempt

depends on the state the debtor lives in. 

family farmer or family fisherman An

individual, individual and spouse,

corporation, or partnership engaged in a

farming or fishing operation that meets

certain debt limits and other statutory

criteria for filing a petition under chapter 12.

fraudulent transfer A transfer of a debtor’s

property made with intent to defraud or for

which the debtor receives less than the

transferred property’s value.

fresh start The characterization of a

debtor’s status after bankruptcy, i.e., free of

most debts. (Giving debtors a fresh start is

one purpose of the Bankruptcy Code.)

insider (of an individual debtor) Any

relative of the debtor or of a general partner

of the debtor; partnership in which the

debtor is a general partner; general partner

of the debtor; or a corporation of which the

debtor is a director, officer, or person in

control. 

insider (of a corporate debtor) A director,

officer, or person in control of the debtor; a

partnership in which the debtor is a general

partner; a general partner of the debtor; or a

relative of a general partner, director,

officer, or person in control of the debtor.

joint administration A court-approved

mechanism under which two or more cases

can be administered together. (Assuming no

conflicts of interest, these separate

businesses or individuals can pool their

resources, hire the same professionals, etc.)
75

joint petition One bankruptcy petition filed by

a husband and wife together.

lien The right to take and hold or sell the

property of a debtor as security or payment for

a debt or duty.

liquidation A sale of a debtor’s property with

the proceeds to be used for the benefit of

creditors.

liquidated claim A creditor’s claim for a fixed

amount of money.

means test Section 707(b)(2) of the Bankruptcy

Code applies a “means test” to determine

whether an individual debtor’s chapter 7 filing

is presumed to be an abuse of the Bankruptcy

Code requiring dismissal or conversion of the

case (generally to chapter 13). Abuse is

presumed if the debtor’s aggregate current

monthly income (see definition above) over 5

years, net of certain statutorily allowed

expenses is more than (i) $10,000, or (ii) 25%

of the debtor’s nonpriority unsecured debt, as

long as that amount is at least $6,000. The

debtor may rebut a presumption of abuse only

by a showing of special circumstances that

justify additional expenses or adjustments of

current monthly income. 

motion to lift the automatic stay A request by

a creditor to allow the creditor to take action

against the debtor or the debtor’s property that

would otherwise be prohibited by the automatic

stay.

no-asset case A chapter 7 case where there are

no assets available to satisfy any portion of the

creditors’ unsecured claims.

nondischargeable debt A debt that cannot be

eliminated in bankruptcy. Examples include a

home mortgage, debts for alimony or child

support, certain taxes, debts for most

government funded or guaranteed

educational loans or benefit overpayments,

debts arising from death or personal injury

caused by driving while intoxicated or under

the influence of drugs, and debts for

restitution or a criminal fine included in a

sentence on the debtor’s conviction of a

crime. Some debts, such as debts for money

or property obtained by false pretenses and

debts for fraud or defalcation while acting in

a fiduciary capacity may be declared

nondischargeable only if a creditor timely

files and prevails in a nondischargeability

action.

objection to dischargeability A trustee’s or

creditor’s objection to the debtor being

released from personal liability for certain

dischargeable debts. Common reasons

include allegations that the debt to be

discharged was incurred by false pretenses

or that debt arose because of the debtor’s

fraud while acting as a fiduciary.

objection to exemptions A trustee’s or

creditor’s objection to the debtor’s attempt

to claim certain property as exempt from

liquidation by the trustee to creditors.

party in interest A party who has standing

to be heard by the court in a matter to be

decided in the bankruptcy case. The debtor,

the U.S. trustee or bankruptcy administrator,

the case trustee and creditors are parties in

interest for most matters.

petition preparer A business not

authorized to practice law that prepares

bankruptcy petitions.
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plan A debtor’s detailed description of how the

debtor proposes to pay creditors’ claims over a

fixed period of time.

plaintiff A person or business that files a formal

complaint with the court.

postpetition transfer A transfer of the debtor’s

property made after the commencement of the

case.

prebankruptcy planning The arrangement (or

rearrangement) of a debtor’s property to allow

the debtor to take maximum advantage of

exemptions. (Prebankruptcy planning typically

includes converting nonexempt assets into

exempt assets.)

preference or preferential debt payment A

debt payment made to a creditor in the 90-day

period before a debtor files bankruptcy (or

within one year if the creditor was an insider)

that gives the creditor more than the creditor

would receive in the debtor’s chapter 7 case.

presumption of abuse see means test

priority The Bankruptcy Code’s statutory

ranking of unsecured claims that determines the

order in which unsecured claims will be paid if

there is not enough money to pay all unsecured

claims in full. For example, under the

Bankruptcy Code’s priority scheme, money

owed to the case trustee or for prepetition

alimony and/or child support must be paid in

full before any general unsecured debt (i.e. trade

debt or credit card debt) is paid.

priority claim An unsecured claim that is

entitled to be paid ahead of other unsecured

claims that are not entitled to priority status.

Priority refers to the order in which these

unsecured claims are to be paid.

proof of claim A written statement and

verifying documentation filed by a creditor

that describes the reason the debtor owes the

creditor money. (There is an official form

for this purpose.)

property of the estate All legal or equitable

interests of the debtor in property as of the

commencement of the case.

reaffirmation agreement An agreement by

a chapter 7 debtor to continue paying a

dischargeable debt (such as an auto loan)

after the bankruptcy, usually for the purpose

of keeping collateral (i.e. the car) that would

otherwise be subject to repossession. 

secured creditor A creditor holding a claim

against the debtor who has the right to take

and hold or sell certain property of the

debtor in satisfaction of some or all of the

claim.

secured debt Debt backed by a mortgage,

pledge of collateral, or other lien; debt for

which the creditor has the right to pursue

specific pledged property upon default.

Examples include home mortgages, auto

loans and tax liens.

schedules Detailed lists filed by the debtor

along with (or shortly after filing) the

petition showing the debtor’s assets,

liabilities, and other financial information.

(There are official forms a debtor must use.)

small business case A special type of

chapter 11 case in which there is no

creditors’ committee (or the creditors’

committee is deemed inactive by the court)

and in which the debtor is subject to more

oversight by the U.S. trustee than other

chapter 11 debtors. The Bankruptcy Code
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contains certain provisions designed to reduce

the time a small business debtor is in

bankruptcy.

statement of financial affairs A series of

questions the debtor must answer in writing

concerning sources of income, transfers of

property, lawsuits by creditors, etc. (There is an

official form a debtor must use.)

statement of intention A declaration made by

a chapter 7 debtor concerning plans for dealing

with consumer debts that are secured by

property of the estate.

substantive consolidation Putting the assets

and liabilities of two or more related debtors

into a single pool to pay creditors. (Courts are

reluctant to allow substantive consolidation

since the action must not only justify the benefit

that one set of creditors receives, but also the

harm that other creditors suffer as a result.)

341 meeting The meeting of creditors required

by section 341 of the Bankruptcy Code at which

the debtor is questioned under oath by creditors,

a trustee, examiner, or the U.S. trustee about

his/her financial affairs. Also called creditors’

meeting

transfer Any mode or means by which a debtor

disposes of or parts with the debtor’s property.

trustee The representative of the bankruptcy

estate who exercises statutory powers,

principally for the benefit of the unsecured

creditors, under the general supervision of the

court and the direct supervision of the U.S.

trustee or bankruptcy administrator. The trustee

is a private individual or corporation appointed

in all chapter 7, chapter 12, and chapter 13 cases

and some chapter 11 cases. The trustee’s

responsibilities include reviewing the debtor’s

petition and schedules and bringing actions

against creditors or the debtor to recover

property of the bankruptcy estate. In chapter

7, the trustee liquidates property of the

estate, and makes distributions to creditors.

Trustees in chapter 12 and 13 have similar

duties to a chapter 7 trustee and the

additional responsibilities of overseeing the

debtor’s plan, receiving payments from

debtors, and disbursing plan payments to

creditors.

U.S. trustee An officer of the Justice

Department responsible for supervising the

administration of bankruptcy cases, estates,

and trustees; monitoring plans and

disclosure statements; monitoring creditors’

committees; monitoring fee applications;

and performing other statutory duties.

Compare, bankruptcy administrator.

undersecured claim A debt secured by

property that is worth less than the full

amount of the debt.

unliquidated claim A claim for which a

specific value has not been determined.

unscheduled debt A debt that should have

been listed by the debtor in the schedules

filed with the court but was not. (Depending

on the circumstances, an unscheduled debt

may or may not be discharged.)

unsecured claim A claim or debt for which

a creditor holds no special assurance of

payment, such as a mortgage or lien; a debt

for which credit was extended based solely

upon the creditor’s assessment of the

debtor’s future ability to pay.

voluntary transfer A transfer of a debtor’s

property with the debtor’s consent.
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