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Bankruptcy 101

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The U.S. Constitution gives Congress power to delegate, create, amend and repeal federal laws. Accordingly, Article I, Section 8, of the United States Constitution authorizes Congress to enact “uniform laws on the subject of bankruptcies.” The procedural aspects of the bankruptcy process are governed by the Federal Rules of Bankruptcy Procedure, as well as by local rules of each bankruptcy court.

The Judiciary Act of 1789 divides the country into 13 regional circuits, each having one U.S. Court of Appeals (with nationwide jurisdiction). Circuits 1 through 12 serve various regions of the U.S., while the 13th Circuit serves the District of Columbia and the Federal Circuit. The Court of Appeals hears appeals to decisions of the district courts within its circuit and appeals to decisions of federal regulatory agencies. 

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94 U.S. District CourtsWithin the 13 regional circuits, there are 94 eastern, central and southern districts, each composed of regional district courts and bankruptcy courts. To access our online directory of each district court’s Web site click here. The district courts hear almost all cases regarding federal civil and criminal laws and their decisions are usually appealed to the district's Court of Appeals. 

Bankruptcy cannot be filed in state courts. Federal courts have jurisdiction over all bankruptcy cases.

Bankruptcy laws have two fundamental purposes:

1. Give an honest debtor a "fresh start" in life by relieving the debtor of most debts
2. Repay creditors in an orderly manner to the extent that the debtor has property available for payment

These goals are accomplished through a 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.

Six basic types of bankruptcy cases exist under the U.S. Bankruptcy Code:

CHAPTER 7
Liquidation

Court-supervised procedure where trustee takes over the debtor's estate assets and reduces them to cash to make distributions to creditors

CHAPTER 9
Municipality

Much like reorganization under Chapter 11, but for municipalities

CHAPTER 11
Reorganization

Used by commercial enterprises that desire to continue operating a business and repay creditors concurrently through a court-approved plan of reorganization

CHAPTER 12
Farmer or Fisherman

Provides debt relief to family farmers and fishermen with regular incomes

CHAPTER 13
Individual

Designed for individual debtors with regular sources of income

CHAPTER 15
Ancillary & Other Cross-Border Cases

Deals with cases of cross-border insolvency

The court official with decision-making power over federal bankruptcy cases is the district’s bankruptcy judge, who may decide on any matter concerning the bankruptcy case. Judges of all federal courts are appointed for life by the president of the U.S. and approved by the Senate. They cannot be removed from office unless they are impeached and convicted by Congress.

Much of the bankruptcy process is highly administrative and is conducted away from the courthouse. For Chapter 7, 12 and 13 cases, and sometimes for Chapter 11 cases, this administrative process is carried out by an appointed trustee overseeing the case. In addition, debtors’ involvement with the bankruptcy judge is usually minimal.