Background
In the United States, an individual or entity may file for bankruptcy to obtain relief from debts. An individual who files for bankruptcy, known as the "debtor," may be allowed to pay as much of his or her debts as possible, under the supervision of a federal bankruptcy court. Any remaining debt is discharged, [2] [3] thus allowing the debtor a financial "fresh start." [4]
Bankruptcy cases are governed by the Bankruptcy Code, which in its current form was enacted as title 11 of the United States Code in 1978. [5] pursuant to the Bankruptcy Clause of Article I, Section 8 of the Constitution. [6]
The Bankruptcy Code provides for several different types of bankruptcy case, each of which is addressed in a separate "chapter" of the Code. The most common type of bankruptcy is liquidation under chapter 7 of the Code, which applies to both individual and corporate debtors. In a chapter 7 case, an individual debtor's non-exempt assets are placed into a bankruptcy estate under the control of a court-appointed trustee for distribution to creditors, and the debtor usually receives a discharge of his or her remaining debts. Alternatively, an individual who earns regular income and whose income is less than a specified annual maximum may instead choose to file a chapter 13 case, under which the individual agrees to repay all or a portion of his or her debts under a repayment plan approved by the bankruptcy court. (There is also an additional option, chapter 12, available for debtors who are farmers or fishermen.)
Another type of bankruptcy case is reorganization under chapter 11 of the Bankruptcy Code. In a chapter 11 case, unless the court orders otherwise, the debtor retains operating control of their assets as a "debtor in possession" and is allowed a period of time within which to propose a "plan of reorganization" to address creditor claims. The procedures for chapter 11 reorganization cases are complex and were widely understood to apply only to business debtors—that is, business entities such as corporations, and individuals who were the owners of a business enterprise. However, the Code did not expressly state that chapter 11 excluded individuals who were not engaged in business from filing a chapter 11 case.
Facts and procedural history
Sheldon Toibb, an individual in financial distress, filed a chapter 7 bankruptcy petition in Missouri. Among his assets, Toibb listed stock in corporation. The stock later turned out to be worth more than Toibb had expected. Toibb filed a motion to convert his bankruptcy case from a chapter 7 liquidation to a chapter 11 reorganization, to avoid the liquidation of the stock.
The bankruptcy court initially granted the motion, but later ordered Toibb "to show cause why his petition should not be dismissed because petitioner was not engaged in business and, therefore, did not qualify as a chapter 11 debtor." [7] Toibb argued that he was engaged in a business, or in the alternative, that individuals who do not own businesses are also eligible for relief under Chapter 11. [7] The bankruptcy court rejected these arguments based on Eighth Circuit precedent and [8] held that Toibb "failed to qualify for relief under Chapter 11." [7]
Toibb appealed to the United States District Court for the Eastern District of Missouri, which affirmed the decision of the bankruptcy judge. On further appeal, the Eighth Circuit also affirmed. [9]
Toibb petitioned the Supreme Court for a writ of certiorari to review the Eighth Circuit's decision, based on conflicting decisions between the Eighth Circuit, which had held that only businesses and business owners may file for chapter 11, and the United States Court of Appeals for the Eleventh Circuit, which had held that individuals can file under chapter 11 even if they do not own a business. [7] [10]
Opinion of the Court
Justice Harry A. Blackmun wrote the opinion of the Court, speaking for eight Justices. The Court held that nothing in the Bankruptcy Code prevents an individual debtor from filing for Chapter 11 Bankruptcy, even if he or she is not engaged in a business.
The Court's opinion stated that in interpreting a statute, courts "look first to the statutory language and then to the legislative history if the statutory language is unclear." [11] Here, the relevant statute was Section 109 of the Bankruptcy Code, which defines who may be a debtor under the different chapters or types of bankruptcy case. [12] Section 109(d) provides that "[o]nly a person that may be a debtor under chapter 7 of this title, except a stockbroker or a commodity broker, and a railroad may be a debtor under chapter 11 of this title." In turn, Section 109(b) provides that "[a] person may be a debtor under chapter 7 of this title" as long as the person is not a railroad, insurance company, or bank or similar financial institution. [13] Nothing in the text of the Code requires that only businesses or individuals engaged in a business can file for chapter 11 reorganization. Given the great care with which Congress enumerated [14] those who can and cannot receive protection under each chapter, the Court was "loath to infer the exclusion of certain classes of debtors from the protections of Chapter 11." [15]
Turning to the legislative history of the then-current version of the Bankruptcy Code, the Court acknowledged that a Senate report showed that Congress anticipated that businesses would be the most common parties to file under chapter 11. However, this did not show that only businesses could permissibly file under chapter 11. [16] Likewise, the Court considered the ultimate purposes of the various chapters of the Code, one of which is "maximizing the value of the bankruptcy estate"; [17] because a chapter 11 reorganization plan must be approved by creditors or must provide that creditors "will receive not less than they would receive under a Chapter 7 liquidation," [18] denying chapter 11 protection to individuals would not advance Congress' overall purpose.
Finally, the Court considered the possibility that if chapter 11 were held to apply to individuals, an individual could be subjected to an involuntary chapter 11 case leading to "debt peonage," a form of involuntary servitude). (Although chapter 13 bankruptcy petitions are always voluntary, a chapter 11 case can be commenced by creditors.) However, the Court observed, if a debtor chose not to cooperate in a chapter 11 case, the bankruptcy court could simply to convert the case to a chapter 7 liquidation.
Justice Stevens' dissent
Justice Stevens dissented, acknowledging that "[t]he Court's reading of the statute is plausible," given that the statutory language does not expressly exclude non-business debtors from chapter 11 and the Senate Report language quoted in the majority opinion. Nonetheless, Justice Stevens disagreed with the Court's conclusion, opining that chapter 11 of the Bankruptcy Code was intended to apply to business debtors only.
In support of his view, Justice Stevens noted that chapter 11 is entitled "Reorganization," and that the statutory language of chapter 11 refer repeatedly to a "business." Additionally, while section 109(d) of the Bankruptcy Code provides that only a person that may be a debtor under chapter 7 may be a debtor under chapter 11, it does not provide that all persons eligible under chapter 7 may also file under chapter 11. [19]
Turning to legislative history to resolve this ambiguity, Stevens agreed that the Senate Report assumes that only businesses would ever file under chapter 11. While the Senate Report does not exclude the possibility that individuals may make use of that chapter as well, it notes that the cost of filing for chapter 11 would likely prevent individuals from using it. Moreover, Justice Stevens continued, the corresponding House Report "unambiguously states that a Chapter 7 liquidation is 'the only remedy' for 'consumer debtors [who] are unable to avail themselves of the relief provided under chapter 13.'" [20]
Justice Stevens also stressed that the Code allows involuntary chapter 11 cases and that if individuals not engaged in business were subject to chapter 11, the Code does not protect them from being subject to such a filing. [21] For these reasons, Stevens concluded in dissent that chapter 11 should apply only to "business debtors."
Bankruptcy is a legal process through which people or other entities who cannot repay debts to creditors may seek relief from some or all of their debts. In most jurisdictions, bankruptcy is imposed by a court order, often initiated by the debtor.
Chapter 11 is a chapter of Title 11, the United States Bankruptcy Code, which permits reorganization under the bankruptcy laws of the United States. Chapter 11 bankruptcy is available to every business, whether organized as a corporation, partnership or sole proprietorship, and to individuals, although it is most prominently used by corporate entities. In contrast, Chapter 7 governs the process of a liquidation bankruptcy, though liquidation can be done under Chapter 11 also; while Chapter 13 provides a reorganization process for the majority of private individuals.
Chapter 7 of Title 11 of the United States Code governs the process of liquidation under the bankruptcy laws of the United States, in contrast to Chapters 11 and 13, which govern the process of reorganization of a debtor. Chapter 7 is the most common form of bankruptcy in the United States.
Title 11 of the United States Code sets forth the statutes governing the various types of relief for bankruptcy in the United States. Chapter 13 of the United States Bankruptcy Code provides an individual the opportunity to propose a plan of reorganization to reorganize their financial affairs while under the bankruptcy court's protection. The purpose of chapter 13 is to enable an individual with a regular source of income to propose a chapter 13 plan that provides for their various classes of creditors. Under chapter 13, the Bankruptcy Court has the power to approve a chapter 13 plan without the approval of creditors as long as it meets the statutory requirements under chapter 13. Chapter 13 plans are usually three to five years in length and may not exceed five years. Chapter 13 is in contrast to the purpose of Chapter 7, which does not provide for a plan of reorganization, but provides for the discharge of certain debt and the liquidation of non-exempt property. A Chapter 13 plan may be looked at as a form of debt consolidation, but a Chapter 13 allows a person to achieve much more than simply consolidating his or her unsecured debt such as credit cards and personal loans. A chapter 13 plan may provide for the four general categories of debt: priority claims, secured claims, priority unsecured claims, and general unsecured claims. Chapter 13 plans are often used to cure arrearages on a mortgage, avoid "underwater" junior mortgages or other liens, pay back taxes over time, or partially repay general unsecured debt. In recent years, some bankruptcy courts have allowed Chapter 13 to be used as a platform to expedite a mortgage modification application.
Personal bankruptcy law allows, in certain jurisdictions, an individual to be declared bankrupt. Virtually every country with a modern legal system features some form of debt relief for individuals. Personal bankruptcy is distinguished from corporate bankruptcy.
In the United States, bankruptcy is governed by federal law, commonly referred to as the "Bankruptcy Code" ("Code"). The United States Constitution authorizes Congress to enact "uniform Laws on the subject of Bankruptcies throughout the United States". Congress has exercised this authority several times since 1801, including through adoption of the Bankruptcy Reform Act of 1978, as amended, codified in Title 11 of the United States Code and the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA).
Insolvency is the state of being unable to pay the money owed, by a person or company, on time; those in a state of insolvency are said to be insolvent. There are two forms: cash-flow insolvency and balance-sheet insolvency.
The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA), is a legislative act that made several significant changes to the United States Bankruptcy Code. Referred to colloquially as the "New Bankruptcy Law", the Act of Congress attempts to, among other things, make it more difficult for some consumers to file bankruptcy under Chapter 7; some of these consumers may instead utilize Chapter 13.
A fraudulent conveyance, or fraudulent transfer, is an attempt to avoid debt by transferring money to another person or company. It is generally a civil, not a criminal matter, meaning that one cannot go to jail for it, but in some jurisdictions there is potential for criminal prosecution. It is generally treated as a civil cause of action that arises in debtor/creditor relations, particularly with reference to insolvent debtors. The cause of action is typically brought by creditors or by bankruptcy trustees.
A debtor in possession in United States bankruptcy law is a person or corporation who has filed a bankruptcy petition, but remains in possession of property upon which a creditor has a lien or similar security interest. A corporation which continues to operate its business under Chapter 11 bankruptcy proceedings is a debtor in possession.
A discharge in United States bankruptcy law, when referring to a debtor's discharge, is a statutory injunction against the commencement or continuation of an action to collect, recover or offset a debt as a personal liability of the debtor. The discharge is one of the primary benefits afforded by relief under the Bankruptcy Code and is essential to the "fresh start" of debtors following bankruptcy that is a central principle under federal bankruptcy law. Discharge is also believed to play an important role in credit markets by encouraging lenders, who may be more sophisticated and have better information than debtors, to monitor debtors and limit risk-taking.
An unfair preference is a legal term arising in bankruptcy law where a person or company transfers assets or pays a debt to a creditor shortly before going into bankruptcy, that payment or transfer can be set aside on the application of the liquidator or trustee in bankruptcy as an unfair preference or simply a preference.
A general assignment or assignment is a concept in bankruptcy law that has a similar meaning, due to common law ancestry, in different jurisdictions, but wide dispersion in practical application. The "assignment for the benefit of creditors", also known as an ABC or AFBC is an alternative to bankruptcy, which is a "general assignment"/"assignment" concept.
Title 11 of the United States Code, also known as the United States Bankruptcy Code, is the source of bankruptcy law in the United States Code.
Chapter 9, Title 11, United States Code is a chapter of the United States Bankruptcy Code, available exclusively to municipalities and assisting them in the restructuring of their debt. On July 18, 2013, Detroit, Michigan became the largest city in the history of the United States to file for Chapter 9 Bankruptcy protection. Jefferson County, Alabama, in 2011, and Orange County, California, in 1994, are also notable examples. "The term 'municipality' denotes a political subdivision or public agency or instrumentality of a State," but does not include a state itself.
The Federal Rules of Bankruptcy Procedure are a set of rules promulgated by the Supreme Court of the United States under the Rules Enabling Act, directing procedures in the United States bankruptcy courts. They are the bankruptcy law counterpart to the Federal Rules of Civil Procedure.
The history of bankruptcy law in the United States refers primarily to a series of acts of Congress regarding the nature of bankruptcy. As the legal regime for bankruptcy in the United States developed, it moved from a system which viewed bankruptcy as a quasi-criminal act, to one focused on solving and repaying debts for people and businesses suffering heavy losses.
Bankruptcy in Florida is made under title 11 of the United States Code, which is referred to as the Bankruptcy Code. Although bankruptcy is a federal procedure, in certain regards, it looks to state law, such as to exemptions and to define property rights. The Bankruptcy Code provides that each state has the choice whether to "opt in" and use the federal exemptions or to "opt out" and to apply the state law exemptions. Florida is an "opt out" state in regard to exemptions. Bankruptcy in the United States is provided for under federal law as provided in the United States Constitution. Under the federal constitution, there are no state bankruptcy courts. The bankruptcy laws are primarily contained in 11 U.S.C. 101, et seq. The Bankruptcy Code underwent a substantial amendment in 2005 with the "Bankruptcy Abuse Prevention and Consumer Protection Act of 2005", often referred to as "BAPCPA". The Bankruptcy Code provides for a set of federal bankruptcy exemptions, but each states is allowed is choose whether it will "opt in" or "opt out" of the federal exemptions. In the event that a state opts out of the federal exemptions, the exemptions are provided for the particular exemption laws of the state with the application with certain federal exemptions.
Bank of America, N. A. v. Caulkett, 575 U.S. ___, 135 S. Ct. 1995 (2015), is a bankruptcy law case decided by the Supreme Court of the United States on June 1, 2015. In Caulkett, the Court held that 11 U.S.C. § 506(d) does not permit a Chapter 7 debtor to void a junior mortgage on the debtor's property when the amount of the debt secured by the senior mortgage on that property exceeds the property's current market value.
The Insolvency and Bankruptcy Code, 2016 (IBC) is the bankruptcy law of India which seeks to consolidate the existing framework by creating a single law for insolvency and bankruptcy. The Insolvency and Bankruptcy Code, 2015 was introduced in Lok Sabha in December 2015. It was passed by Lok Sabha on 5 May 2016 and by Rajya Sabha on 11 May 2016. The Code received the assent of the President of India on 28 May 2016. Certain provisions of the Act have come into force from 5 August and 19 August 2016. The bankruptcy code is a one stop solution for resolving insolvencies which previously was a long process that did not offer an economically viable arrangement. The code aims to protect the interests of small investors and make the process of doing business less cumbersome. The IBC has 255 sections and 11 Schedules.
