Bankruptcy liquidations usually destroy much of the value of the assets.
Congress has repeatedly passed bankruptcy acts. These acts have often emerged from times of economic crisis, and have generally made filing for bankruptcy easier. Congress passed the Acts of 1898, 1933, 1934, 1978, 2001 and 2009 in response to depression, recession or widespread financial panic. The U.S. Supreme Court subsequently reversed some of these ameliorating provisions. In the 2005 act, Congress made some bankruptcy filings more difficult. The most substantial recent act, the Bankruptcy Act of 1994, helped debtors and creditors alike.
Obtaining a Copy
You may obtain a searchable copy of the Bankruptcy Reform Act of 1994 (H. R. 5116) from the Library of Congress. In broadest outline, the act makes it easier for debtors to file under Chapter 13, which allows the debtor considerable protection while reorganizing. The act helps creditors by excluding from bankruptcy relief certain kinds of credit card debt.
The Intent of the 1994 Bill
With the 1994 bill, Congress intended to reduce liquidations in bankruptcy by making reorganization easier. "Liquidation" means the disposition of all assets owned by the bankrupt corporation, partnership or individual, and the distribution of the assets to the creditors. "Reorganization" means the continuing function of the bankrupt entity under some form of supervision, with the aim of rehabilitating the debtor, and the repayment of all or some portion of the debt. Chapter 7 of the bill describes the liquidation process. Chapters 11 and 13 describe two different forms of reorganization.
Chapter 11
Under the 1994 act, corporations, partnerships and individuals may file under Chapter 11. Chapter 11 bankruptcy filings have no debt ceiling. The debtor keeps the assets and operates under court supervision. The debtor must first submit a reorganization plan---a map of the planned financial recovery---to the creditors. If the creditors do not accept the plan, a court-appointed trustee will appoint a committee of the largest creditors, who will negotiate a reorganization plan with the debtor.
Chapter 13
Congress describes in Chapter 13 a somewhat different reorganization plan. Chapter 13 gives the debtor substantial advantages over Chapter 11. It allows the debtor time to pay taxes and child support---two debts that can't be discharged in the liquidation process of Chapter 7. It forgives indebtedness that exceeds the value of the asset. It cures defaulted mortgages by requiring the lender to restore the loan status of the debtor and to accept the repayments, which may be only partial, described in the plan.
Objections to the 1994 Act
Creditors and some members of Congress have objected to the extent of protection offered in Chapter 13 of the 1994 act. Under terms of the 2005 Bankruptcy Act, President George W. Bush declared, "Americans who have the ability to pay will be required to pay back at least a portion of their debts. ... Serial filers [will find it more difficult] to abuse the most generous bankruptcy protections." The 2005 act made bankruptcy filings more transparent, required debt counseling for debtors and increased the debtor's accountability.
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