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.