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Bankruptcy in the U.S. Constitution and Statutes

 Posted on April 04, 2016 in Bankruptcy Law

Bankruptcy is federal law. The U.S. Constitution has said so from the beginning. Find the Bankruptcy Code in Title 11 of the U.S. Code.

If you’re considering bankruptcy and are trying to read up on it, this may help make sense of it.

The U.S. Constitution

The Constitution gave Congress the power “to establish... uniform laws on the subject of bankruptcies throughout the United States.” (Article 1, Section 8, Clause 4.) This particular power is near the top of a long list of legislative powers the Constitution granted to Congress.

Why Bankruptcy is in the Constitution

Bankruptcy may seem like a minor issue in the grand scheme of setting up a new nation. But making bankruptcy a federal responsibility instead of a state one actually went to the heart of what the Constitutional Convention of 1787 was trying to address.

Under the earlier Articles of Confederation (written in 1776-77) the states acted in many ways like independent countries, with their own money and their own laws regulating trade with other states, and even with other countries. There was no national court system. The national government had no power to pass laws on interstate commerce, including bankruptcy. So, different states had their own bankruptcy laws, creating intense confusion and conflict among the states and their residents.

Giving the national government power over interstate commerce, including to create a uniform bankruptcy law, was an essential ingredient in economically unifying the country.

Getting Congress to Use its Constitutional Power

The Constitution gave Congress power to pass “uniform laws on the subject of bankruptcies” but then Congress still had to write and pass those laws.

It’s not just the current Congress that can’t get anything done. For most of the first 110 years under the Constitution there were no bankruptcy laws on the books at all!

Why? Because of gridlock—there was so much disagreement about some of the most basic principles of bankruptcy. In particular there was deep conflict between creditor-dominated states in the Northeast where the major banks were located and states in the South and West populated mostly by debtor farmers and merchants.

So Congress only managed to pass temporary bankruptcy laws to address some of the severe economic downturns that the swept the nation regularly throughout the 1800s. These laws were passed three times, but were all repealed within just a few years. Finally, in 1898 the first “permanent” bankruptcy law was passed, and we’ve had one since then. The current Bankruptcy Code has been in effect since 1979.

The Bankruptcy Code

All the federal statutes are compiled in the United States Code (abbreviated as “U.S.C.”). It has 51 “Titles,” of which Title 11 covers bankruptcy. It’s commonly called the Bankruptcy Code.

The Bankruptcy Code is divided into nine Chapters. The first three are about general bankruptcy issues, while the remaining six Chapters lay out specific bankruptcy options—Chapter 7, Chapter 11, and so on. A bankruptcy case is referred to by the Chapter under which it is filed, as in a “Chapter 13” case. (See two blog posts ago for a short explanation of the most relevant Chapters.

The specific statutes within each Chapter are called Sections.

Some Important Sections of the Bankruptcy Code

Here are some noteworthy Sections for consumers and small business owners:

  • Section 341: The “meeting of creditors”—a usually short and straightforward hearing with your bankruptcy trustee which you need to attend; a misleading name because in most cases no creditors attend
  • Section 362: Automatic stay—stops creditor collections once a bankruptcy is filed
  • Section 522: Exemptions—assets protected in bankruptcy; you need to look at your state’s exemption statutes as well as or instead of these federal ones (depending on your state)
  • Section 523: Exceptions to discharge—types of debts that will not or might not be “discharged” (legally written off) in a bankruptcy case
  • Section 524: Effect of discharge—what happens with the legal write-off of a debt, including sanctions for creditors who pursue a debt after its been discharged
  • Section 727: Chapter 7 "means test" and discharge—qualifying for Chapter 7 through your income and sometimes other considerations
  • Section 1322: Contents of plan—what a Chapter 13 payment plan may or must include
  • Section 1325: Confirmation of plan—requirements for getting bankruptcy court approval of your payment plan
  • Section 1328: Chapter 13 Discharge—its requirements and exceptions

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