| Bankruptcy is a legally declared inability or impairment of ability of an individual or organization to pay their
creditors. A declared state of bankruptcy can be requested or initiated by the bankrupt individual or organisation, or it
can be requested by creditors in an effort to recoup a portion of what they are owed. However, in the overwhelming majority of
cases, the bankruptcy is initiated by the "bankrupt" individual or organization.
The primary purpose of the laws of bankruptcy are: (1) to give an honest debtor a "fresh start" in life by relieving the
debtor of most debts, and (2) to repay creditors in an orderly manner to the extent that the debtor has property available for
payment.
Bankruptcy allows the debtor to resolve his debts through the division of his assets among his creditors. Additionally the
declaration of bankruptcy allows debtors to be discharged of most of the financial obligations, after their assets are
distributed, even if their debts have not been paid in full. During the pendency of a
bankruptcy proceeding, the "Debtor" is protected from extra-Bankruptcy action by
creditors by a legally imposed "stay."
History
This word is formed from the ancient Latin bancus a
bench, or table, and ruptus, broken. Bank originally signified a
bench, which the first bankers had in the public places, in markets, fairs, &c. on which they told their money, wrote their
bills of exchange, &.c. Hence, when a banker failed, they broke his bank, to advertise the public that the person to whom the
bank belonged was no longer in a condition to continue his business. As this practice was very frequent in Italy, it is said the term bankrupt is derived from the Italian banco rotto, broken bench (see e.g. Ponte Vecchio). Others rather choose to deduce the word from the French banque, table, and route, vestigium, trace, by metaphor from the
sign left in the ground, of a table once fastened to it and now gone. On this principle they trace the origin of bankrupts from
the ancient Roman mensarii or argentarii, who had their tabernae or mensae in certain public places;
and who, when they fled, or made off with the money that had been entrusted to them, left only the sign or shadow of their former
station behind them.
Bankruptcy in the United Kingdom
In the United Kingdom (UK), a Trustee in bankruptcy must be either an Official Receiver (a civil servant) or a licensed insolvency practitioner.
Following the introduction of the Enterprise Act, a UK bankruptcy will now normally last no longer than 12 months and may be less, if the
Official Receiver files in Court a certificate that his investigations are complete.
It is expected that the UK Government's liberalisation of the UK bankruptcy regime will massively increase the number of
bankruptcy cases; initial Government statistics appear to bear this out. It remains to be seen whether the leash has been
loosened too far and whether the legislation will need reviewing if the system becomes too overheated with debt-dumping
debtors.
Bankruptcy in the United States
Bankruptcy is federal statutory law (Title 11 of the United
States Code) based upon the Constitutional
requirement for "uniform laws on the subject of Bankruptcy throughout the United States." (Article I, Section 8).
Bankruptcy proceedings are undertaken in the United States Bankruptcy Courts, part of the District Court system.
There are several types of proceedings that fit under the general category bankruptcy. The U S Bankruptcy Code has multiple chapters, each describing a different procedure
available for debt resolution. Liquidation under a Chapter 7 filing is the most
common form of bankruptcy. 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. Bankruptcy under Chapter
11, Chapter 12, or Chapter 13 is more complex and involves allowing the
debtor to use future earnings to pay off creditors. In addition, there is Chapter 9 bankruptcy, available only to municipalities; perhaps the most famous example of a municipal bankruptcy was in
Orange County, California. Chapter 9 is a form
of reorganization, not liquidation. Chapter 12 is somewhat like Chapter 13 but is only available to farmers in certain
situations. As recently as mid-2004 Chapter 12 was scheduled to expire but in late 2004 it was given a renewed lease on life.
Bankruptcy can be entered into voluntarily by the debtor. It can also be commenced involuntarily by as few as one creditor if
the debt owed is large enough. An involuntary bankruptcy may be used as a collection tool but its use can be very risky and, if
wielded improperly, may subject the creditor to large damages.
Some property is exempt from being sold to pay debts in a bankruptcy. The law varies greatly from state to state. In some
states, exempt property includes equity in a home or car, tools of the trade, and some amount of personal effects. In other
states an asset class such as tools of trade will not be exempt by virtue of its class except to the extent it is claimed under a
more general exemption for personal property.
One major purpose of bankruptcy is to ensure orderly and reasonable management of debt. Thus, exemptions for personal effects
are thought to prevent punitive seizures of personal items of little or no economic value (diary, toothbrush, ordinary clothing),
since this does not promote any desirable economic result. Similarly, tools of the trade may, depending on the available
exemptions, be a permitted exemption as their continued possession allows the insolvent debtor to move forward into productive
work as soon as possible.
Not every debt may be discharged under every chapter of the Code. Certain taxes owed to
Federal, state or local government, government guaranteed student loans, and support
obligations are not dischargeable (but nb., guaranteed student loans are potentially dischargeable should the debtor
prevail in a difficult-to-win adversary proceeding brought in the nature of a complaint to determine dischargeability that's brought
against the lender; also, the debtor can petition the court for a "financial hardship" discharge, but it is very rare that such a
discharge is granted). The debtor's liability on a Secured debt, such as a
mortgage or mechanics
lien on a home, may be discharged, but the effects of the mortgage or mechanics lien cannot be discharged in most cases if it
affixed prior to filing, so if the debtor wishes to retain the property, the debt must usually be paid for as agreed. (See also
lien avoidance, reaffirmation
agreement)(Note: there may be additional flexiblity available in Chapter 13
for debtors dealing with oversecured collateral such as a financed auto, so long as the oversecured property is not the debtor's
primary residence.)
Also, any debt tainted by one of a variety of wrongful acts recognized by the Bankruptcy code, including defalcation, or consumer
purchases or cash advances above a certain amount incurred a short time before filing, cannot be discharged. However, certain
kinds of debt, such as debts incurred by way of fraud, may be dischargeable through the Chapter 13 super discharge. All in all, as of 2005, there are 19
general categories of debt that cannot be discharged in a Chapter 7 bankruptcy,
and fewer debts that cannot be discharged under Chapter 13.
Bankruptcy Abuse Prevention & Consumer Protection Act of 2005
The United States Congress is considering (in
2005) legislation that would vastly change the laws of bankruptcy as they pertain to
individuals. Some of the more significant (and controversial) changes include:
- Making it more difficult for individuals to receive a Chapter 7 discharge. A means test is to be imposed on would-be filers, one that is linked to whether the debtor's earnings in the
six-month period prior to filing were above or below the median income for the debtor's state of residence.
- Making Chapter 13 far less attractive by, amongst other things, eliminating its "super discharge," eliminating the ability of
debtors to "cram down" non-residential secured property (i.e., to disallow them from paying off the real value of the secured
property as secured while treating the excess value as unsecured, by disallowing the reduction of interest charged on the debt to
reasonable values), by removing the credit for payments on retained secured property from the calculation of disposable income,
and by requiring that debtors undergo counselling in order to file under Chapter 13.
- Requiring that debtor counsel conducts an investigation of their clients' filings and be personally liable for them, a duty
apparently unprecedented under U.S. law. A similar requirement will likely force debtors desiring to reaffirm to attend a court
hearing and prove to the court that they can meet obligations they wish to reaffirm (because few debtor's attorneys will wish to
certify their belief of their client's prospective ability to pay on a reaffirmed debt). Those who cannot thus prove will be
compelled to surrender the property.
- Limiting the homestead protection to $125,000 in equity and establishing a 40 month residency period before such protections
are recognized in Bankruptcy.
The legislation is supported by President George W. Bush and
opposed by Democrats. This legislation was originated during the
Clinton Administration and had more bi-partisan support
at the time. But the bill has languished for years due to disagreements in Congress
as to the level of the means test, and whether anti-abortion groups can
use bankruptcy to discharge fines levied to them by courts for actions that resulted in property damage or injury such as bombing
abortion clinics.
Bankruptcy fraud
Bankruptcy fraud is a federal crime. Its provisions are found at Title 18 of the United States Code. Bankruptcy fraud is prosecuted by the United States Attorney, typically after a reference from the United States Trustee, the Interim
Trustee, or a bankruptcy judge.
When bankruptcy is filed with criminal intent, as bankruptcy fraud, a business crime, the debtor may be subject to a felony prosecution in federal court. This should be
distinguished from strategic bankruptcy, which is not a criminal act (but may
prejudice a judge against the filer if there is evidence that bankruptcy is being used strategically). Common types of bankruptcy
fraud include petition mills,
false oath, concealment of assets, fraudulent conveyance, etc. Multiple filings are not per se fraudulent; as with all things in the law, it
depends on the circumstances.
Bankruptcy fraud can also sometimes lead to criminal prosecution in state courts, under the charge of theft of the goods or services obtained by the debtor for which payment, in whole or in part, was evaded by the fraudulent
bankruptcy filing.
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