Congress is empowered to enact bankruptcy laws pursuant to its Constitutional grant of authority to "establish. . . uniform laws on the subject of Bankruptcy throughout the United States." These laws are codified in Title 11 of the United States Code
. States may not regulate bankruptcy though they may pass laws that govern other aspects of the debtor-creditor relationship. A number of sections of Title 11, however, do incorporate the debtor-creditor laws of the individual states.
Bankruptcy law provides for the development of a plan that allows a debtor, who is unable to pay creditors, to resolve debts through the division of assets among creditors. Bankruptcy proceedings are supervised by and litigated in the United States Bankruptcy Courts. These Bankruptcy Courts are a subdivison of the United States Federal District Courts, and act under the supervision of the District Courts. Bankruptcy Judges are not appointed for life, rather they are appointed to serve a term of 14 years. In order to facilitate the efficient administration of a bankruptcy proceeding, a United States Trustee is appointed to handle many of the supervisory and administrative duties of the proceeding. The Trustee ultimately submits reports and findings to the Bankruptcy Judge, who maintains immediate oversight of a bankruptcy proceeding.
There are two basic types of bankruptcy proceedings: (1) liquidation; and (2) reorganization. Liquidation involves the appointment of a trustee who collects the non-exempt property of the debtor, sells it, and distributes the proceeds to the creditors. Reorganizations seek to rehabilitate the debtor and allow for future earnings to be used to pay off creditors. Both of these types of bankruptcy options are available to individuals as well as corporate entities. If a corporate entity liquidates, the entity ceases to exist, is wound down, and finally closed. If a corporate entity reorganizes, the Trustee will allow for the discharge of certain obligations and thereby allow the debtor business the opportunity to streamline and remain in business.