Bankruptcy

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 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.

Bankruptcy

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 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.

Contents:
1 Purpose
2 History
3 Bankruptcy fraud
4 Bankruptcy in Canada
4.1 Duties of Trustees
4.2 Creditors' Meetings
4.3 Consumer Proposals - An Alternative to Personal Bankruptcy
4.4 Bankruptcy Reform
4.5 Student Loans in Bankruptcy
5 Bankruptcy in the United Kingdom
6 Bankruptcy in the United States
6.1 Bankruptcy Chapters
6.1.1 Chapter 7
6.1.2 Chapter 13
6.2 Sources
7 Bibliography

Purpose

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 debtors to resolve debts through the division of non-exempt assets among creditors. Additionally the declaration of bankruptcy allows debtors to be discharged of most of the financial obligations, after their non-exempt 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, etc. on which they tolled their money, wrote their bills of exchange, etc. Hence, when a banker failed, he broke his bank, to advertise to 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 fraud

Bankruptcy fraud is a business crime of filing for bankruptcy with criminal intent, that is with the intention of evading payment for goods even though the buyer has funds that could be used to pay for them, or accepting payment for goods or services but not supplying them. Common types of bankruptcy fraud include petition mills, false oath, concealment of assets, and fraudulent conveyance. Multiple filings are not per se fraudulent; as with all things in the law, it depends on the circumstances. Bankruptcy fraud 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).

Bankruptcy in Canada

Main article: Bankruptcy in Canada

Bankruptcy in Canada is set out by federal law, in the Bankruptcy and Insolvency Act and is applicable to businesses and individuals. The office of the Superintendent of Bankruptcy, a federal agency, is responsible for ensuring that bankruptcies are administered in a fair and orderly manner. Trustees in bankruptcy administer bankruptcy estates.

Duties of Trustees

Some of the duties of the trustee in bankruptcy are to:
Prepare the bankruptcy documents that assign the person into bankruptcy.
Review the file for any fraudulent preferences or reviewable transactions
Chair meetings of creditors
Sell any non-exempt assets
Perform counselling for the debtors.
Object to the bankrupt's discharge.

Creditors' Meetings

Creditors become involved by attending creditors' meetings. The trustee calls the first meeting of creditors for the following purposes:
To consider the affairs of the bankrupt
To affirm the appointment of the trustee or substitute another in place thereof
To appoint inspectors
To give such directions to the trustee as the creditors may see fit with reference to the administration of the estate.

Consumer Proposals - An Alternative to Personal Bankruptcy

In Canada a person can file a consumer proposal as an alternative to bankruptcy. A consumer proposal is a negotiated settlement between a debtor and their creditors.

A typical proposal would involve a debtor making monthy payments for a maximum of five years, with the funds distributed to their creditors. Even though most proposals call for payments of less than the full amount of the debt owing, in most cases the creditors will accept the deal, because if they donít, the next alternative may be personal bankruptcy, where the creditors will get even less money.

The creditors have 45 days to accept or reject the consumer proposal. Once the proposal is accepted the debtor makes the payments to the Proposal Administrator each month, and the creditors are prevented from taking any further legal or collection action. If the proposal is rejected, the debtor may have no alternative but to declare personal bankruptcy.

A consumer proposal can only be made by a debtor with debts of $75,000 or less (not including the mortgage on their principal residence). If debts are greater than $75,000, the proposal must be filed under Division 1 of Part III of the Bankruptcy and Insolvency Act.

The assistance of a Proposal Administrator is required. A Proposal Administrator is generally a licensed trustee in bankruptcy, although the Superintendent of Bankruptcy, may appoint other people to serve as administrators.

According to the Superintendent of Bankruptcy, in 2004 84,426 consumers filed personal bankruptcy, and 15,551 individuals filed a consumer proposal.

Bankruptcy Reform

Bankruptcy reform legislation has been passed into law with Canadian Senate approval and Royal assent on November 25, 2005. The new law will not come into force until June 30, 2006 at the earliest.

A summary and an analysis of the major changes are given in a link at the bottom of this page.

Student Loans in Bankruptcy

Prior to 1997, student loans were discharged in bankruptcy. In September 1997 the Bankruptcy & Insolvency Act was amended so that student loans were only discharged in a bankruptcy if they were more than two years old.

In 1998 the rules were changed again, increasing the time period from two years to ten years. Under bankruptcy reform (see above) student loans will be automatically discharged after 7 years (or 5 years with court approval). A history of changes to the treatment of student loans in bankruptcy can be found at Student Loan Bankruptcy.

Bankruptcy in the United Kingdom

Main article: Bankruptcy in the United Kingdom

In the United Kingdom (UK), bankruptcy (in a strict legal sense) relates only to individuals and partnerships. Companies and other corporations enter into differently-named legal insolvency procedures: liquidation, administration and administrative receivership. However, the term 'bankruptcy' is often used (incorrectly) when referring to companies in the media and in general conversation.

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 2002, 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.

There were 15,394 individual insolvencies in England and Wales in the second quarter of 2005 on a seasonally adjusted basis. This was an increase of 11.7% on the previous quarter and an increase of 36.8% on the same period a year ago.

This was made up of 11,195 bankruptcies, an increase of 7.8% on the previous quarter and 27.5% on the corresponding quarter of last year, and 4,199 Individual Voluntary Arrangements (IVAís), an increase of 23.7% on the previous quarter and an increase of 69.6% on the corresponding quarter of the previous year.

Bankruptcy in the United States

Main article: Bankruptcy in the United States

Bankruptcy in the United States is a matter placed under Federal jurisdiction by the United States Constitution (in Article 1, Section 8), which allows Congress to enact "uniform laws on the subject of Bankruptcy throughout the United States." Its implementation, however, is found in statute law. The relevant statutes are incorporated within the Bankruptcy Code, located at Title 11 of the United States Code, and amplified by state law in the many places where Federal law either fails to speak or defers expressly to state law.

While bankruptcy cases are always filed in United States Bankruptcy Court (an adjunct to the U.S. District Courts), bankruptcy cases, particularly with respect to the validity of claims and exemptions, are often highly dependent upon State law. State law therefore plays a major role in many bankruptcy cases, and it is often quite unwise to generalize bankruptcy issues across state lines.

Bankruptcy Chapters

There are six types of bankruptcy under the Bankruptcy Code, located at Title 11 of the United States Code:
Chapter 7 (a liquidation-style case for individuals or businesses),
Chapter 9 (Municipal bankruptcy)
Chapter 11 (a more complex rehabilitation-style case used primarily by business debtors, but sometimes by individuals with substantial debts and asset).
Chapter 12 (a payment plan or rehabilitation-style case for family farmers and fishermen), and
Chapter 13 (a payment plan or rehabilitation-style case for individuals with a regular source of income),
Chapter 15 (Ancillary and Other Cross-Border Cases)

The most common types of personal bankruptcy for individuals are Chapter 7 and Chapter 13.

Chapter 7 Bankruptcy

Chapter 7 personal bankruptcy is also known as straight bankruptcy, or liquidation bankruptcy. Under Chapter 7, debtors give up certain property that they own when they go bankrupt. The property is sold, and the proceeds are used to pay the creditors. In most cases debtors do not have any assets, and thus in most cases they do not lose anything. In most Chapter 7 cases most debts are discharged about 90 days after filing. Debts that are discharged (which means they go away) include credit card debts. Debts that are not discharged would include child support payments and some taxes and student loans. Secured debts, such as car loans and house mortgages, are also not discharged. Under the new rules implemented as a result of the 2005 Bankruptcy Reform, it is now more difficult to qualify for Chapter 7 bankruptcy. Debtors are subject to a means test, and if income exceeds limits set by the government, the debtor must file under Chapter 13.

Chapter 13

Chapter 13 personal bankruptcy is also known as a Wage Earner Plan. Under Chapter 13 the debtor keeps all of their property, but in return they make regular payments to a trustee, who distributes the payments to the creditors. Most Chapter 13 plans last for three to five years, and then the debts are discharged. Creditors will only accept a Chapter 13 plan if it provides greater realizations for them than a Chapter 7 plan.

Sources

American Bankruptcy Institute

Bankruptcy America

U. S. Bankruptcy Courts

Bibliography

Born Losers: A History of Failure in America, by Scott A. Sandage (Harvard University Press, 2005).

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