Where Does Bankruptcy Law Come From? Part 1: The Code

25 Feb Where Does Bankruptcy Law Come From? Part 1: The Code

Bankruptcy law in the United States is an amalgam of rules that comes from various sources sometimes with an exquisite harmony — like a fine orchestra — and sometimes with great disharmony — like an engine with a blown bearing. The variety of sources for the law makes it particularly complex to practice as a lawyer and difficult to comprehend for the layman.

In a series of notes, we hope to lay out the basic idea — where does the law come from?

Bankruptcy is specifically designated in the Constitution as a subject of federal legislation, not state law. This is why there is no specific bankruptcy for New York or Iowa, St. Louis or Cleveland. There is one federal law enacted by the U.S. Congress.

This law is known as the Bankruptcy Code (under Title 11 of the U.S. Code). The Code is divided into Chapters, which serve different purposes. For example the first three Chapters (1, 3, and 5) provide definitions, tools, powers, rights, and responsibilities for the various actors in the bankruptcy process — which generally apply in most of the other Chapters. The later Chapters (7, 9, 11, 12, 13, and 15) are the choices available to individuals or businesses under which they can seek relief (and through which creditors can attempt to obtain repayment in an orderly fashion).

The Bankruptcy Code itself is very short, a few hundred pages. Indeed until 2005, it was one of the shortest of the federal laws meant for general public use and, even after the unfortunate BAPCPA amendments, it still only fills a relatively short book. This is because, even after 2005, much of the Code is written in broad, generalized terms, designed by Congress to provide broad rights and responsibilities, benefits and sanctions, to the players.

The Code itself is not generally written to address every, or even most, factual scenarios that will show up in a complex financial community like the United States. Congress left the day-to-day application of the Code to individual situations to a specialized federal court system, the bankruptcy courts, and (overseeing the bankruptcy courts) the federal appeals courts and the Supreme Court. We will discuss the courts in another installment.

One feature of bankruptcy law that will always confuse outsiders is that it is not exclusively based on federal law, however. Title 11 is not the only set of statute books the bankruptcy lawyer needs. For example, at the heart of the fight in bankruptcy court are property rights — a debtor’s right to protect their property from creditors and the creditors’ rights to collect a lawful debt — which are themselves defined, in part, under state law. And some debt collection tools — like fraudulent transfer avoidance laws — were incorporated from state law into the federal law.

In addition, as part of an unusual political deal many years ago, states were allowed to elect to “opt-out” of a national standard for the amount and extent of property individual debtors could protect in bankruptcy court. If your state opted-out — as many have — then you may end up protecting very little wealth in bankruptcy while your friend across the state line might protect a great deal more. And, after 2005, the law of states you have not lived in for the last two years may still apply to you, or not, depending on where else you’ve lived, how long, and how those laws apply to non-residents! Although these provisions provide different sources and results, they still all apply in a bankruptcy case only by operation of the federal law itself. They are like a piece of a Monet painting pasted into a Manet work, sometimes it can be a beautiful thing, sometimes quite jarring. But still a single piece of many parts.

We will try to address state law and state courts in more detail in future installments as well.

Photo Credit: Sabianmaggy

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I have been a bankruptcy attorney since 1989. Our firm represents consumers filing bankruptcy almost exclusively, although I have represented bankruptcy trustees as well as creditors. For 2017-2019 I served on the American Bankruptcy Institute's Commission on Consumer Bankruptcy. Our Report recommended numerous changes to improve bankruptcy law to make it serve everyone in the process more effectively. If you live in Eastern Missouri, visit our website, send an e-mail or give us a call (314) 781-3400. Our website: STLBankruptcy.com
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