WHAT TO EXPECT IN COURT
Federal Bankruptcy Law in Courts
- Authority. The U.S. Constitution grants Congress authority to enact federal bankruptcy laws. The Bankruptcy Act of 1898 formed the basis of federal bankruptcy law until 1979 when the enactment of the Bankruptcy Code (11 U.S.C.) repealed the old law and codified procedures making the bankruptcy process less burdensome for the debtor. A major amendment to the Bankruptcy Code came about with the enactment of the Bankruptcy Reform Act of 1994 (BRA 94) affecting the government’s treatment of debtors, notably by granting permission to assess taxes while the debtor is under the protection of the automatic stay.
- Principle of Bankruptcy. The general underlying principle of bankruptcy provides a debtor, unable to pay all creditors, a way to pay what the debtor can afford while receiving forgiveness for debt that cannot be paid.
- Automatic Stay. The most notable feature of bankruptcy law is the creation of the automatic stay upon the entry of the order for relief.
- When a debtor files a petition in bankruptcy, the court enters an order for relief, which immediately stops and prohibits any attempt by creditors to collect prepetition debts owed by the debtor or otherwise exercise control over property of the estate or the debtor. 11 U.S.C. § 362.
- Debtor. Most bankruptcy proceedings begin when the debtor (the person unable to pay his, her, or its debts) files a petition in bankruptcy court seeking financial relief from creditors. Individuals, corporations, partnerships, railroads, municipalities, and other forms of government have the right to file bankruptcy. IRM 22.214.171.124, Glossary — Bankruptcy Terms, defines “person” as it relates to bankruptcy.
- Advantages to Debtors. Bankruptcy is attractive to debtors because it offers desirable goals. When negotiations with creditors fail, debtors may be faced with immediate garnishment of their salaries and repossessions of their assets. Business debtors may have their businesses closed through repossession or foreclosure.
- Temporary Relief. Bankruptcy offers immediate temporary relief from creditor pressure by staying all creditor actions against the debtor.
- Long-Term Relief. Bankruptcy can provide long-term relief by allowing a debtor to extend the time for payment of a debt.
- Permanent Relief . Finally, bankruptcy can provide permanent relief by discharging debts. The relief provisions of the Bankruptcy Code can give the debtor a fresh start.
- Creditor. Occasionally, creditors will force a debtor into bankruptcy by involuntary means. Creditors include those persons and entities who have claims against the debtor, usually for debts incurred before the bankruptcy was filed (prepetition debts). Because many debtors and bankruptcy estates continue to incur debt after the bankruptcy petition date, creditors can also hold post-petition claims.
- Advantages to Creditors. Bankruptcy also offers advantages to creditors, such as:
- Greater Recovery on Claims. Bankruptcy can offer a greater recovery on creditors’ claims. Traditional debtor/creditor remedies usually lead to the piecemeal dismantling of the debtor’s business through repossession and sale of the debtor’s assets. Such actions by creditors may cause a business to fail.
- Preserves Value of Business. Bankruptcy can preserve the going-concern value of a business. The going-concern value of an operating business enterprise can exceed its liquidation value.
- Operating Enterprise Sale. Bankruptcy allows the sale of a business as an operating enterprise and restrains creditors from precipitous actions.
- Equitable . Each creditor receives a fair share of the funds available.
- Bankruptcy Code. The Bankruptcy Code provides an orderly method for the debtor’s financial rehabilitation (Chapters 11, 12, and 13) or the liquidation and distribution of a debtor’s assets (Chapter 7). It is a federal law, intended to be applied uniformly among all states and possessions.
- Filings. Since the adoption of the Bankruptcy Code, the number of bankruptcies has risen dramatically. Between 1980 and 2003 annual bankruptcy filings rose from 287,570 to 1,660,245. In calendar year 2003, total bankruptcy filings in the United States increased 5.2 percent from the number of filings in calendar year 2002. (Data released by the Administrative Office of U.S. Courts.)
- Jurisdiction. Bankruptcy courts generally have jurisdiction over all matters concerning payment of a debtor’s financial obligations under the Bankruptcy Code and administration of the bankruptcy estate. Bankruptcy court jurisdiction includes the authority to determine the amount of tax due by the debtor or estate and what taxes will be discharged, meaning the debtor no longer will be personally liable. The bankruptcy court also has jurisdiction over any matters concerning collection of tax debts at issue in the bankruptcy case, or collection from any property of the estate.
- Bankruptcy Judges. Bankruptcy judges are appointed under Article I of the U.S. Constitution by the appellate circuit courts for a term of 14 years.
- Office of Division Counsel. The Office of Division Counsel (Small Business/Self-Employed SB/SE) provides primary legal services on a local basis to the Small Business/Self-Employed and Wage and Investment Operating Divisions. It holds responsibility for collection and bankruptcy work, regardless of the type of taxpayer entity involved.
- Area Counsels/Associate Area Counsels. The Office of Division Counsel (Small Business/Self-Employed) headquartered in New Carrollton, Maryland, is divided into eight SB/SE Area Counsels with 49 local offices. Associate Area Counsel, present in offices formerly staffed by District Counsel or Associate District Counsel, report to the Area Counsel for their geographic area.
- Local Associate Area Counsel. Local Insolvency offices should deal directly with attorneys in their local Associate Area Counsel (SB/SE) office on issues requiring case-specific legal advice and guidance. Throughout IRM 25.17 Bankruptcy, the term “Counsel” is used to indicate Associate Area Counsel (SB/SE).
- Communication – Counsel and Insolvency. A good working relationship between Insolvency and Counsel fosters quality bankruptcy programs. Ongoing dialogue between Insolvency and Counsel should be maintained to ensure proper actions are taken by Insolvency. Counsel can apprise Insolvency of current court decisions and issues that arise, particularly at the local level.
- Outreach. Insolvency and Counsel are encouraged to promote continuing interaction with trustees and members of the bar association to work cooperatively at the local level in resolving matters of mutual concern. Outreach efforts afford a venue to resolve recurring bankruptcy issues and concerns with stakeholders.
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