Where does Bankruptcy come from?

Like Gelatin, people look at Bankruptcy and often wonder where it comes from?

The great news, for those curious about Bankruptcy anyway, is that it involves less in the way of hooves and more in the way of legal rights.

When people asked Tom where Bankruptcy comes from, he would say this:

Where does bankruptcy law come from?

Well, it starts with the Constitution.

But the more specific sources of bankruptcy law shows up at Title 11 of the United States Code; that’s located here. Another source, which might be a little easier to use, is here.

You can find a load of interesting bankruptcy information here, but you have to read it carefully. Bankruptcy law often looks like it’s written in English.

But it’s not!

Many terms used in the Bankruptcy Code are technical terms of art, and mean different or more specific things than you think they do. To begin to understand the way the Code is structured, it’s a good idea to read the definition located at 11 USC 101 (Definitions) and 11 USC 102 (Rules of Construction).

If you don’t read those first, you’ll read statutes inside the Code and believe you understand them, and you’ll be just plain wrong! Okay, I know that’s strong language for a lawyer, but I hope you get my point.

Inside the statute you will be able to read about some topics that I’ll discuss in more detail in other posts.

For instance, you can read about the Automatic Stay, located at 11 USC 362, which is a primary debtor protection under the Code; it prevents most creditors from continuing the “race of diligence”, which occurs in a pre-bankruptcy situation, where the creditor who moves fastest gets the mostest. The automatic stay comes into existence when the bankruptcy petition is filed, and that’s when the bankruptcy estate comes into existence as well.

The property of the bankruptcy estate is described at 11 USC 541, and it’s a broad description. If the debtor owns mining claims on the planet Neptune, those mining claims are part of the bankruptcy estate.

In a Chapter 7 case, which is the most common sort of bankruptcy filing (there are also Chapter 13s which are payment plans, and Chapter 11s which involve plans of reorganization and are usually for businesses but can be for individuals, and Chapter 12s for Family Farmers), property becomes property of the estate, and may stop being property of the estate under several circumstances.

For instance, the property can be abandoned out of the estate. Property that’s abandoned out of a Chapter 7 case is generally worthless, and the application for abandonment is often filed by a trustee who doesn’t want to be burdened with worthless property in the estate.

Or property can be exempted, which is more common. Individuals have a right to certain exemptions, under a sometimes confusing combination of Federal and State law. You can take a look at 11 USC 522 to start your inquiry.

A nice, straightforward laundry list of exemptions used by debtors in Arizona Chapter 7 cases is located at the website of the United States Bankruptcy Court for the State of Arizona, in the faqs, under Debtor Frequently Asked Questions, item 15. At some point I’ll put it in a format that I can include that list here, but for now, blame it on technological clumsiness and go to that website.

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