Bankruptcy in the United States: Key Questions and Answers

1. What is bankruptcy in the United States, and which chapters of the Bankruptcy Code are most commonly used?

Bankruptcy in the United States is a federal legal procedure that allows individuals and organizations to obtain protection from creditors and resolve debt obligations. It is governed by the United States Bankruptcy Code (Title 11 of the U.S. Code), enacted in 1978 and amended on numerous occasions. The most widely used chapters are as follows:

Chapter 7 (Liquidation): provides for the liquidation of the debtor’s assets to satisfy debts. Available to both individuals and companies. Upon completion, most unsecured debts are discharged. As of 2024, approximately 60% of all individual bankruptcy filings are made under Chapter 7.
Chapter 11 (Reorganization): used primarily by companies to reorganize their business and continue operations while restructuring debts. The debtor proposes a reorganization plan that must be approved by creditors and the court.
Chapter 13 (Adjustment of Debts): designed for individuals with regular income. Allows the debtor to develop a debt repayment plan spanning 3 to 5 years while retaining property, including their home.
Chapter 12: a specialized procedure for family farmers and fishermen.
Chapter 9: available to municipal entities — cities, counties, and utility services.

The choice of a particular chapter depends on the type of debtor, the structure of the debt, the availability of assets, and the strategic objective — liquidation or preservation of the business.

2. What key changes to U.S. bankruptcy legislation have occurred in recent years?

Bankruptcy law in the United States continues to evolve. Among the most significant recent developments:

Small Business Reorganization Act (SBRA, 2019): created Subchapter V within Chapter 11, substantially simplifying and reducing the cost of reorganization for small businesses. The debt ceiling for Subchapter V was initially set at $2,725,625, but was temporarily raised to $7.5 million in 2020 under the CARES Act in response to the COVID-19 pandemic. Subsequent legislation extended this threshold, and in 2024 Congress was considering making it permanent.
COVID-19 and emergency measures (2020–2022): the pandemic led to an increase in bankruptcy filings and the adoption of special legislative measures, including expanded access to restructuring procedures, temporary relief from certain requirements, and higher debt thresholds.
Student loan discharge reform: student debt was traditionally considered virtually non-dischargeable in bankruptcy. However, in 2022–2024 the U.S. Department of Justice and Department of Education revised their policy in a more flexible direction, making it easier for debtors to demonstrate “undue hardship” for student loan discharge.
Increased scrutiny of Chapter 11 abuses: in response to high-profile cases (Johnson & Johnson, Purdue Pharma), courts and Congress have been discussing restrictions on the use of so-called “Texas Two-Step” and “third-party releases” — mechanisms that allowed large companies to escape liability for mass claims through the bankruptcy of subsidiary entities.

3. What is the “automatic stay” and what significance does it hold for the debtor?

The automatic stay is one of the foundational provisions of U.S. bankruptcy law, codified in Section 362 of the Bankruptcy Code. It takes effect immediately upon the filing of a bankruptcy petition — without any additional court order. From the moment of filing, all creditor collection actions are automatically halted. In particular, the following are prohibited:

commencement or continuation of lawsuits against the debtor;
enforcement of judgments;
seizure of property (foreclosure, repossession);
debiting of bank accounts;
sending payment demands;
termination of utility services (for the first 20 days).

For the debtor, the automatic stay constitutes a “breathing spell” — an opportunity to put affairs in order, assess assets and liabilities, and develop a restructuring or liquidation plan free from creditor pressure.

Exceptions to the automatic stay are provided for: criminal prosecution; collection of alimony and child support; tax audits; and actions by regulatory authorities.

A creditor may petition the court for relief from the automatic stay — for example, where the creditor faces the loss of collateral. The court may grant such relief upon a showing of “cause,” or where the debtor has no equity in the collateral and it is not necessary for reorganization.

4. How does the Chapter 11 bankruptcy process work for large corporations?

Chapter 11 is the most complex and costly form of bankruptcy, yet it is precisely the mechanism that allows large corporations to continue operating, restructure their debts, and emerge from crisis renewed. The key elements of the procedure are as follows:

Debtor-in-Possession (DIP): the debtor generally retains control of the business and operates as “debtor-in-possession.” Appointment of an external trustee occurs only upon proof of fraud or gross mismanagement.
DIP financing: the company may obtain new financing that takes priority over pre-existing obligations. This is critical to maintaining operations during the proceedings.
Creditor committees: an Official Committee of Unsecured Creditors is formed to participate in negotiations and oversee the debtor’s actions.
Plan of reorganization: during the initial 120-day exclusivity period, the debtor has the sole right to propose a reorganization plan. After this period, creditors may also propose their own plan. The court confirms a plan if it meets the “best interests of creditors” standard and has passed a class-by-class vote.
Cramdown: if one or more classes of creditors reject the plan, the court may confirm it over their objections provided certain fairness conditions are met.

Among the largest cases in recent years are the bankruptcies of Bed Bath & Beyond (2023), Yellow Corporation (2023), WeWork (2023), and SVB Financial (2023) — each illustrating both the possibilities and the limitations of Chapter 11 in the current economic environment.

5. What are “preferential payments” and why do they matter in the context of bankruptcy?

A preferential transfer (or preference) is a payment or transfer of property to a creditor made within a specified period prior to the filing of a bankruptcy petition, which may be avoided and recovered for the benefit of the bankruptcy estate. Section 547 of the Bankruptcy Code allows the trustee or debtor-in-possession to avoid such transfers where the following conditions are met: the payment was made to a creditor; on account of an antecedent debt; while the debtor was insolvent; within 90 days of filing (or one year for “insiders”: directors, major shareholders, and affiliates); and the payment enabled the creditor to receive more than it would have received in a Chapter 7 liquidation.

The purpose of this institution is to ensure the equal distribution of the debtor’s assets among creditors of the same priority class, and to prevent “well-informed” creditors from collecting their debts on the eve of bankruptcy at the expense of others.

Affirmative defenses available to creditors include:

Contemporaneous exchange: if the payment was made in exchange for new consideration, it does not constitute a preference.
Ordinary course of business: payments made in the ordinary course of the debtor’s business are protected.
New value: if, after receiving the payment, the creditor provided new goods or services to the debtor of comparable value.

6. How are individual debts discharged in U.S. bankruptcy, and which debts cannot be discharged?

Upon completion of bankruptcy under Chapter 7 or Chapter 13, the individual receives a discharge — a permanent court injunction prohibiting creditors from collecting the listed obligations. This legally eliminates the debtor’s personal liability on the included debts.

Debts that are generally dischargeable include:

unsecured loans (credit cards, consumer loans);
medical bills;
lease arrears (after lease termination);
certain older tax debts (subject to specific conditions).

Debts that are NOT dischargeable (Section 523) include:

alimony and child support obligations (domestic support obligations);
most tax debts;
student loans (with rare exceptions upon proof of undue hardship);
debts arising from fraud;
debts for personal injury or death caused by drunk driving;
fines and penalties payable to the government;
debts not listed in the bankruptcy petition;
restitution payments under criminal judgments.

A trend of 2023–2025: courts have become somewhat more liberal on the question of student loan discharge, particularly following the issuance of new U.S. Department of Justice guidance facilitating the demonstration of “undue hardship.” As regards repeat bankruptcy filings, restrictions apply to the timing of subsequent petitions (for example, at least 8 years must elapse between two Chapter 7 filings).

7. What is a “fraudulent transfer” in the context of bankruptcy?

A fraudulent transfer (or fraudulent conveyance) is a disposition of the debtor’s assets made with the intent to hinder creditors, or for less than reasonably equivalent value while the debtor was insolvent. Section 548 of the Bankruptcy Code allows transfers made within 2 years of the filing to be avoided. In addition, the trustee may invoke state law through Section 544(b), which often allows recovery of transfers made further in the past (in some states, up to 6 years).

There are two types of fraudulent transfers:

Actual fraud: a transfer made with actual intent to hinder, delay, or defraud creditors. Proved through “badges of fraud”: transaction with an affiliate, secrecy, inadequate consideration, transfer on the eve of major litigation, retention of control over the transferred property.
Constructive fraud: a transfer for less than reasonably equivalent value while the debtor was insolvent or that rendered the debtor insolvent — even without fraudulent intent.

Practical examples include: the transfer of real estate to a spouse on the eve of bankruptcy; the sale of assets to affiliated entities at below-market prices; and the payment of excessive dividends or management fees during a period of insolvency. The topic has taken on particular relevance in the context of “Texas Two-Step” cases — a corporate strategy whereby a company restructures itself to isolate mass tort liabilities in a subsidiary entity, which then files for bankruptcy. U.S. courts and legislators are actively debating the legitimacy of such schemes.

8. How does bankruptcy affect a debtor’s credit history and financial future in the United States?

Bankruptcy has a serious and long-term impact on an individual’s credit history, yet it does not mark the “end of financial life” — with a disciplined approach, rehabilitation is entirely achievable.

A Chapter 7 bankruptcy remains on the credit report for 10 years from the date of filing;
A Chapter 13 bankruptcy remains for 7 years;
In general, a credit score drops by 130–240 points immediately following the filing.

Consequences for financial life include:

Mortgage lending: after Chapter 7, a waiting period of 2–4 years is required depending on the loan type (FHA — 2 years; conventional mortgage — 4 years);
Rental housing: many landlords check credit history and may refuse to rent;
Employment: employers in certain sectors (finance, government service) conduct credit history checks;
Insurance: premiums may increase;
Interest rates on new loans are significantly higher.

The path to recovery: experience shows that disciplined debtors who start with secured credit cards and pay current bills on time can restore their credit scores to acceptable levels within 2–3 years. Despite the negative consequences, for many debtors with unmanageable obligations, bankruptcy proves a better strategy than endless attempts to service an unaffordable debt that erodes financial health for years to come.

9. What is a “plan of reorganization” and what are the requirements for its content and confirmation?

A plan of reorganization is the central document in a Chapter 11 bankruptcy proceeding, setting out the manner in which creditor claims will be satisfied and the future structure of the debtor’s business. Its content must include: classification of creditor claims into groups (classes) based on their nature and priority; a description of how each class of claims will be satisfied — in full, partially, through conversion to equity, via asset sales, or otherwise; a description of changes to corporate structure, governance, and operations; and the funding sources for the plan.

Voting procedure: creditors vote for or against the plan within their respective classes. A class is deemed to have accepted the plan if creditors representing at least two-thirds of the amount of claims AND more than half of the number of voting creditors vote in favor. Classes whose claims are paid in full are deemed to have automatically accepted the plan (unimpaired). Classes receiving nothing are deemed to have automatically rejected it.

Standards for court confirmation include:

Best interests test: each creditor who voted against must receive at least as much as it would under a Chapter 7 liquidation;
Feasibility: the plan must be realistically executable and must not contemplate further liquidation;
Good faith: the plan must have been proposed in good faith.

Cramdown: where at least one accepting class exists, the court may confirm the plan over the objections of dissenting classes, provided the plan is “fair and equitable” with respect to those classes — in particular, that it respects the absolute priority rule.

10. What are the features of commercial real estate bankruptcy in current conditions?

Bankruptcy in the commercial real estate (CRE) sector has taken on particular urgency in 2023–2025 against a backdrop of rising interest rates, a post-pandemic office market crisis, and refinancing difficulties. The key procedural features are as follows:

Single Asset Real Estate (SARE): the Bankruptcy Code contains special rules for debtors whose activity involves a single real estate asset. In particular, a secured creditor may more quickly obtain relief from the automatic stay if the debtor fails to begin timely interest payments or fails to file a realistic reorganization plan.
“Dirt for debt”: in Chapter 11 proceedings, the parties frequently agree on the transfer of real property to the creditor in satisfaction of the debt, avoiding protracted litigation.
Office market crisis: the decline in office occupancy rates (to 50–60% of pre-pandemic levels in major U.S. cities) has led to sharp falls in the value and income-generating capacity of office properties. A wave of bankruptcies has affected REITs and developers unable to refinance at elevated rates.
Multifamily residential: despite sustained demand, a number of developers who took on floating-rate debt during the low-rate era have found themselves in difficulty. Bankruptcies in this segment have increased since 2023.
Structural features: CRE transactions are frequently structured through special purpose vehicles (SPVs). While this isolates risk, in the event of SPV bankruptcy creditors face limited recourse to the assets of parent entities.

Overall, the CRE sector remains one of the most troubled areas of the U.S. financial system, and the number of bankruptcies in this sector is expected by analysts to remain elevated at least through 2026.

11. What is the role of the bankruptcy trustee, and how does it differ from the debtor-in-possession?

In the U.S. bankruptcy system, the bankruptcy trustee and the debtor-in-possession (DIP) are two fundamentally distinct legal statuses with different powers and functions.

Chapter 7 Trustee: appointed automatically in every liquidation case. Principal functions include: collection and inventory of the debtor’s assets; liquidation (sale) of property; avoidance of preferential and fraudulent transfers; distribution of proceeds to creditors in order of priority; and verification of the accuracy of information submitted by the debtor.
Chapter 11 Trustee: appointed by the court in exceptional circumstances — upon proof of fraud, incompetence, or gross abuse of authority by management. Takes over management of the debtor’s business.
Debtor-in-Possession (DIP): the standard Chapter 11 construct. The existing management of the debtor company generally retains control of the business, acquiring the status and powers of a trustee. The DIP must: manage the debtor’s affairs in good faith in the interests of all creditors; obtain court approval for transactions outside the ordinary course of business; report to the court and the Creditors’ Committee; and refrain from acting in the interests of shareholders to the detriment of creditors.
United States Trustee (UST): a separate entity — the U.S. Trustee Program (part of the Department of Justice) — oversees compliance with procedural rules, appoints and supervises trustees, and identifies abuses. In large Chapter 11 cases, an independent examiner is frequently appointed to investigate specific issues not requiring a complete change in management.

12. What are the trends in U.S. corporate bankruptcies in 2023–2025?

The period 2023–2025 has been one of the most active for corporate bankruptcies in the past 10–13 years, driven by a combination of macroeconomic factors. According to Epiq ABI (American Bankruptcy Institute) data, corporate bankruptcies in 2023 increased by approximately 40% compared to 2022. The 2024 trend continued, particularly with respect to large cases (so-called “mega-cases” with debt exceeding $1 billion).

Key sectors with the highest activity include:

Retail: Bed Bath & Beyond, Tuesday Morning, Joann Stores, The Container Store;
Media and telecommunications: Envision Healthcare, Rite Aid, iHeartMedia (repeat filing);
Commercial real estate: numerous REITs and developers;
Healthcare: chronic underfunding and rising operating costs;
Transportation and logistics: Yellow Corporation — one of the largest U.S. trucking companies — filed for bankruptcy in 2023 with approximately $1.2 billion in debt.

Causes of the increase in bankruptcies include:

The sharp increase in Federal Reserve interest rates (from 0.25% to 5.25–5.5%): companies that took on cheap debt in 2020–2021 faced a sudden rise in refinancing costs;
Persistent cost inflation alongside weak consumer demand in certain segments;
The pandemic-era “debt overhang”: many companies survived 2020–2021 through government support, merely deferring the inevitable.

Forecasts: a number of analysts (Moody’s, S&P) anticipated that elevated levels of corporate bankruptcies would persist into 2025, particularly in sectors with high leverage and sensitivity to interest rates.

13. What is the “discharge injunction” and how does it protect the debtor after bankruptcy is completed?

The discharge injunction is a permanent court order that takes effect automatically upon the court’s entry of a discharge order. It is one of the most important elements of protection that the bankruptcy system affords the debtor. Following the discharge, creditors holding discharged debts are prohibited from: bringing any claims or demands against the debtor personally; threatening legal proceedings; sending payment demands; undertaking collection actions (calls, letters, lawsuits); and withholding or debiting funds in satisfaction of the annulled debts.

An important distinction: the discharge injunction protects the debtor from personal liability but does not extinguish a lien on specific property. This means that a secured creditor retains rights against the property, but not the right to pursue the debtor personally.

Consequences of violation: a creditor who violates the discharge injunction may be held in contempt of court. The court may impose fines and order reimbursement of the debtor’s damages and legal costs. In practice, violations of the discharge injunction remain common, particularly by large financial institutions. In 2019, the Federal Reserve and several other regulators fined Wells Fargo for systematic violations of the rights of borrowers who had undergone bankruptcy — an episode that prompted strengthened oversight and more rigorous enforcement.

14. How do international aspects affect bankruptcy proceedings in the United States (cross-border insolvency)?

In an increasingly globalized economy, a growing number of bankruptcy cases involve assets, creditors, and debtors located in different countries. The United States has a specialized legal framework to address such situations.

Chapter 15 of the Bankruptcy Code was introduced in 2005 based on the UNCITRAL Model Law on Cross-Border Insolvency. It allows a foreign representative to petition a U.S. court for recognition of a foreign insolvency proceeding. Two types of foreign proceedings are recognized:

Foreign main proceeding: conducted in the country where the debtor’s Center of Main Interests (COMI) is located. Upon recognition, the automatic stay applies automatically to the debtor’s assets in the United States.
Foreign non-main proceeding: conducted in a country where the debtor has an “establishment” but not its COMI. Affords more limited protection.

U.S. courts have traditionally followed a territorial approach, protecting the interests of domestic creditors. However, Chapter 15 reflects a movement toward modified universalism — recognition of foreign proceedings while preserving certain exceptions to protect U.S. public policy.

Practical challenges include:

Jurisdictional competition: large international companies frequently relocate their COMI deliberately to access more favorable legal regimes (“forum shopping”);
Coordination between courts of different countries requires complex cross-border protocols;
Recognition of discharge: a U.S. discharge may not be recognized in other countries.

Among the most prominent recent cross-border cases is the bankruptcy of FTX (2022–2024), which affected creditors and assets across dozens of jurisdictions worldwide.

15. Can a debtor who has fled abroad avoid criminal prosecution for bankruptcy fraud — and what role does extradition play?

Bankruptcy fraud is a federal criminal offense in the United States, prosecuted under 18 U.S.C. §§ 152–157. It encompasses: willful concealment of assets from the trustee; submission of knowingly false statements under oath; destruction of documents; intentional bankruptcy to avoid debt repayment (bust-out scheme); and bribery of a trustee. Penalties include imprisonment of up to 5 years per count, substantial fines, and forfeiture of property. Where related offenses are involved (securities fraud, money laundering), sentences may reach 20–25 years.

Attempts to evade criminal prosecution by relocating abroad are becoming increasingly ineffective. The United States has an extensive network of bilateral extradition treaties — with more than 100 states. The extradition mechanism operates as follows: the United States submits a formal extradition request through diplomatic channels (the State Department); the requested country reviews the case before its courts for compliance with treaty conditions: dual criminality (the act must be a crime in both countries), sufficiency of evidence, and absence of political motivation; upon satisfaction of the request, the individual is surrendered to U.S. authorities.

The principle of dual criminality: since bankruptcy fraud has equivalents in the criminal law of most developed countries, this criterion is generally satisfied without difficulty. Certain states have no extradition treaty with the United States (Russia, the UAE until recently, and some offshore jurisdictions). However, even in these cases the United States employs alternative mechanisms: Mutual Legal Assistance Treaty (MLAT) requests, pressure through FATF and international financial institutions, asset freezing through OFAC, and cooperation with Interpol.

A notable example: the case of FTX founder Sam Bankman-Fried (2022–2023) — despite his presence in the Bahamas, extradition to the United States was completed within a matter of weeks, as an extradition treaty exists between the two countries. He was subsequently convicted on seven counts of fraud. In sum, flight abroad does not constitute a reliable shield against criminal prosecution for bankruptcy fraud in the United States. International law enforcement cooperation continues to deepen, and the arsenal of legal tools available to secure the extradition of fugitives is steadily expanding.