What is Bankruptcy?
What is Bankruptcy?
Bankruptcy can be defined as legally found or declared inability
or impairment of ability of an individual or business entity to
pay their creditors. This should be distinguished from
insolvency, which is the condition that arise when a debtor has
liabilities that exceed his assets, or when the debtor can no
longer meet his debt obligations when they are due. Insolvent
debtor become bankrupt only when there is a legal finding by the
court to that effect.
Word bankruptcy comes from ancient Latin words bancus (bench),
and ruptus (break) and dates back to Italian bankers who when
they became insolvent signaled this fact by breaking the bench
from which they transacted business.
In United States Bankruptcy comes under Federal jurisdiction in
accordance with to the United States Constitution Article I,
Section 8, which authorizes Congress to enact "uniform Laws on
the subject of Bankruptcies." Congress has implemented this
authority by enacting the Bankruptcy Code, found under Title 11
of the United States Code.
Bankruptcy cases cannot be filed in state courts. They are
filed in United States bankruptcy courts, of which there are one
for each of the ninety odd judicial districts in the country.
Aims
Bankruptcy laws are
designed with two aims in mind, as pointed out by Supreme court
in a 1934 decision. One is to give an honest debtor a "fresh
start" in life by relieving the debtor of most debts. Second is
to repay creditors in an orderly manner to the extent that the
debtor has property available for payment. During the time when
the bankruptcy proceedings are pending the debtor is protected
from judicial or administrative action initiated by creditors
aimed at collection of debt by a legally imposed 'automatic
stay'.
When bankruptcy case is started debtors property subject to
certain exemptions is transferred to a 'estate' created at the
time and administered by a trustee. Exemptions vary depending on
the state, and may or may not include home or car, tools of the
trade, and personal effects. This is designed to allow the
debtors to move forward and not be subject to unnecessary and
uneconomic punitive actions by creditors.
Creditors are divided in to secured creditors and unsecured
creditors. Secured creditors with property secured by lien can,
after obtaining permission from the bankruptcy court, enforce
the lien to recover the property. Unsecured creditors are
further divided in to unsecured priority creditors and general
unsecured creditors. Unsecured priority creditors are classed in
to groups as described in the law. Depending on the case and the
assets of the estate priority unsecured creditors are paid
either fully or in proportion. It is usually only if they are
paid in full, does general unsecured creditors get any payment
at all.
Bankruptcy court achieves its aim of giving a debtor who
honestly disclose all incomes, assets, and liabilities, a 'fresh
start' by giving him a 'bankruptcy discharge'.
Once discharged debtor is not personally liable for certain
specified types of debts. Debts from which a debtor cannot be
discharged include child support and alimony, most taxes, most
student loans, and fines imposed by government or courts.