Introduction to United States Bankruptcy Law
1) What is this course about?
a) United States Bankruptcy law is a federal law that deals with legal questions concerning
people or businesses not paying their debts or are otherwise insolvent.
b) This two-week class will cover general principles of law governing bankruptcy law and
practice in the United States. Unlike some laws in the United States, based on the
“common law” (i.e. law made by judges and not parliaments), Bankruptcy Law is based
on a Federal statute. Reference to a statute for the determination of rights and duties
should be a process familiar to European law students.
c) While all law reflects the society, this is especially the case in bankruptcy law. Should a
business that is insolvent be liquidated or should the law provide a procedure that will
rehabilitate the business? Should individuals who fall into financial trouble have a
process that will enable them to start anew without the burden of their debts? If so,
what debts should remain? How about child support? Should individuals who earn
enough income to make some payment on their debts be forced to pay?
2) Why should I take the course?
a) The study of foreign legal systems and how problems are handled by lawyers and courts
under these systems are interesting in their own right.
b) Law students are expected to be future leaders of their countries. Issues as to how to
deal with persons who do not pay their debts, how to handle businesses who do not pay
their debts and, more recently in the United States, how to address the problems of
governmental units, such as cities that cannot pay their debts to their retirees, are
issues that are not confined to the United States. The EC recommendation of March
2014 proposes that the rescue culture for troubled businesses be embodied in national
legislation. Knowing how the United States has addressed these problems over the
years will not provide immediate answers for any other country, but will be useful to
anyone who is attempting to grapple with the same problems in other countries.
c) For those students who continue on as attorneys and will advise businesses, an
understanding of U.S. law will be important to those clients who do business in the
United States. How can the foreign business protect itself if its customer in the United
States becomes a bankrupt? With globalization, it is not unusual for a business to
supply parts on credit to a foreign customer or to buy parts from such a customer.
Interruption of the “supply chain” caused by the bankruptcy of a chain member will
cause critical business as well as legal problems.
d) In United States law schools, this course is taught by fulltime professors and also by
adjunct professors, such as myself. Adjunct professors are practicing lawyers dealing
with these issues with clients and are able to add practical experience to the academic
discussion of the issues.
e) If you prepare for this class and participate in it, the course should be of interest.
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3) Will I have to do any work?
a) I will provide course materials for each of the sections. The standard materials will be
an excerpt from the applicable provisions of the federal bankruptcy law known as the
Bankruptcy Code. Review of this statutory material will require application of the same
skills of statutory interpretation that is required under any code-based law system. I will
also provide excerpts from certain cases that demonstrate the analysis of the
Bankruptcy Code section(s) that we are studying and explain the court’s view of the
public policy behind the provision.
b) If you read the reference materials before the class, you will gain much more from of a
class section than if you do not.
4) What are the topics covered in the two weeks?
a) The structure of the bankruptcy court system.
b) The policies that are instituted in the Bankruptcy Code.
i) Orderly distribution of property owned by a debtor (the “Estate”) to creditors.
ii) Discharge of debts owed by the honest but unfortunate debtor.
iii) Rehabilitation of businesses.
c) Orderly Distribution of Property of the Estate.
i) Distribution to creditors who have liens or other claims against the debtor’s
property (“Secured Creditor”).
ii) Distribution to creditors who do not have liens or other interests in the debtor’s
property (“Unsecured Creditors”). A related question is whether unpaid workers
have or should have a greater right to the debtor’s property than the taxing
authority?
iii) Recovery of payments made by the debtor prior to bankruptcy.
d) Discharge of debts for individuals.
i) The quick discharge in Chapter 7 of the Bankruptcy Code takes about four months to
obtain in a simple case.
(1) But should this be available to a debtor who has run up bills for consumer debts
shortly before bankruptcy and has income to make payments to his creditors?
(a) The “means test” to prevent Chapter 7 relief to those who are able to make
some payments.
(2) But should quick relief from debt be available to an individual who is liable on his
or her business debts?
(a) Exception to individuals in business.
(3) What debts should be discharged?
(a) Child support? Tax debts? Debts that arise from fraud?
ii) Chapter 13 relief is available only to individuals and provides them with an
opportunity to pay their debts over time.
(1) Plans last from 3 to 5 years.
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(2) The Chapter 13 Plan provides for a mechanism whereby an individual may keep
his or her property by providing for a modification of secured debts either by
reducing the amount of debts or restructuring them.
(3) Plans typically require a debtor to make some payment to unsecured creditors.
e) Rehabilitation of Businesses.
i) Chapter 11.
(1) Provides a mechanism for business as large as General Motors or as small as the
local hardware store to restructure their secured debt, discharge all or a portion
of their unsecured debt and emerge from the Chapter 11 case with a new
balance sheet.
(2) Provide a mechanism to sell substantially all of their assets to a buyer and
provide the buyer with protection from claims of the creditors of the previous
owner.
f) The City of Detroit Chapter 9 case.
i) Detroit enjoyed a long history where its fortunes were governed by the success of
the automobile industry. In recent years, its economy has suffered, its population
has dramatically declined, and its obligations to its retirees continued to mount.
During this period, efforts were made to borrow and otherwise pay for the
substantial costs involved in maintaining a city with a declining population coupled
with a worsening economy.
ii) Detroit finally filed a Chapter 9 bankruptcy case that permitted it to relieve itself of a
substantial amount of its borrowed debt and to make some reductions to the
amounts that it owed to its retirees.
iii) How this was achieved provides a road map for future American cities, as well as
being of interest to others whose countries may face similar situations.
5) Conclusion.
a) The typical bankruptcy course in a United States law school would be a 14-week
semester with three class hours per week. Within the two weeks allotted, I will attempt
to provide some insight into the Bankruptcy Code and its application, and related
practical experiences I have had with clients facing the situations covered in the class.
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