U.S. Bankruptcy Code

Last updated: March 22, 2024

What Does U.S. Bankruptcy Code Mean?

The U.S. Bankruptcy Code is a set of laws in Title 11 of the United States Code that defines the bankruptcy process for both individuals and corporations. Title 11 is divided into nine chapters (some chapters have been repealed over time and the following are those in effect today):

  • Chapter 1 deals with the general provisions about bankruptcy
  • Chapter 3 deals with specific case administration pertaining to bankruptcy
  • Chapter 5 handles the laws related to creditors and debtors
  • Chapter 7 details the liquidation process
  • Chapter 9 talks about how a municipality can adjust its debts
  • Chapter 11 handles the reorganization of a company due to bankruptcy
  • Chapter 12 deals with the adjustment of debts of a farmer or fisherman who has a regular yearly income
  • Chapter 13 deals with individuals who have a steady source of income
  • Chapter 15 deals with cross-border cases and anything else not covered in the previous chapters

Divestopedia Explains U.S. Bankruptcy Code

When an individual or corporation is unable to service the debts acquired, then that individual or corporation can file for bankruptcy under the U.S. Bankruptcy Code. Out of the nine remaining chapters, 7 and 11 are commonly used by corporations while 13 is applicable only to individuals who have declared bankruptcy.

Chapter 7 of the bankruptcy code is the most important one as it governs the liquidation process for both businesses and individuals. This chapter states how and when bankruptcy should be filed and the circumstances under which it is considered to be valid under this code. Subsequently, the liquidation of existing assets and the pay-off of debtors is also described in detail.

Chapters 11 and 13 deal with the reorganization of debt for both individuals and businesses. Chapter 11 is for businesses while chapter 13 is for individuals. In both cases, the rules for reorganization of an entity's debt is explained. Some cases even allow the appointment of a trustee to oversee the reorganization process. Also, the code entitles a court hearing for all creditors in order to provide them with a fair chance of getting their money back.


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