Bankruptcy
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Bankruptcy is a legally declared inability or impairment of ability of an individual or organizations to pay their creditors. Creditors may file a bankruptcy petition against a debtor in an effort to recoup a portion of what they are owed. In the majority of cases, however, bankruptcy is initiated by the debtor (the bankrupt individual or organization).
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[edit] Purpose
The primary purpose of bankruptcy is: (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 the means available for payment. Bankruptcy allows debtors to be discharged from the legal obligation to pay most debts by submitting their non-exempt assets, if any, to the jurisdiction of the bankruptcy court for eventual distribution among their creditors. There are two common forms of bankruptcy, a reorganization bankruptcy and a liquidation bankruptcy.
A reorganization bankruptcy is a bankruptcy where the debtor may reorganize their assets and debts to allow the debtor to carry on with the core of its endeavor while partially satisfying creditor claims. Distinguish this type of bankruptcy from a liquidation bankruptcy where the assets are sold off to satisfy creditor claims. Reorganization bankruptcy may include plans for individuals and for businesses.
Businesses may enter a reorganization bankruptcy in order to survive insolvency due to creditor claims exceeding the ability of the business to satisfy them. The basic process involves a business reducing each creditor's claims to allow partial payment in order for the business to carry on with its daily commercial activity.
Individuals may enter a reorganization bankruptcy in order to retain assets and pay off reduced creditor claims out of the individual's income. A married couple may be treated as an individual.
During the pendency of a bankruptcy proceeding the debtor is protected from most non-bankruptcy legal action by creditors through a legally imposed stay. Creditors cannot pursue lawsuits, garnish wages, or attempt to compel payment.
[edit] History
In the Old Testament of the Bible and Hebrew Scriptures, Moses' Laws prescribed that one "Holy Year" or "Jubilee Year" should take place every half century, when all debts are eliminated among Jews and all debt-slaves are freed, due to the heavenly command. [1]
Moreover, the Hebrew (or Jewish) law of debt forgiveness can be found in the Bible at Deuteronomy 15:1-2 which instructs a release of debt every seven years.
In ancient Greece, bankruptcy did not exist. If a father owed (since only locally born adult males could be citizens, it was fathers who were legal owners of property) and he could not pay, his entire family of wife, children and servants were forced into "debt slavery", until the creditor recouped losses via their physical labour. Many city-states in ancient Greece limited debt slavery to a period of five years and debt slaves had protection of life and limb, which regular slaves did not enjoy. However, servants of the debtor could be retained beyond that deadline by the creditor and were often forced to serve their new lord for a lifetime, usually under significantly harsher conditions.
The word bankruptcy is formed from the ancient Latin bancus (a bench or table), and ruptus (broken). A "bank" originally referred to 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 choose rather 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 is also documented in the Far East. According to al-Maqrizi, the Yassa of Genghis Khan contained a provision that mandated the death penalty for anyone who became bankrupt three times.
The characteristic discharge of debts was introduced to Anglo-American bankruptcy with the statute of 4 Anne ch. 17 in 1705, where the discharge of unpayable debts was offered as a reward to bankrupts who cooperated in the gathering of assets to pay what could be paid.
[edit] Bankruptcy fraud
Bankruptcy fraud is a crime. While difficult to generalize across jurisdictions, common criminal acts under bankruptcy statutes typically involve concealment of assets, concealment or destruction of documents, conflicts of interest, fraudulent claims, false statements or declarations, and fee fixing or redistribution arrangements. Falsifications on bankruptcy forms often constitutes perjury. Multiple filings are not in and of themselves criminal, but they may violate provisions of bankruptcy law. In the U.S., bankruptcy fraud statutes are particularly focused on the mental state of particular actions.[2]
Bankruptcy fraud should be distinguished from strategic bankruptcy, which is not a criminal act, but may work against the filer.
[edit] 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 expressly defers 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 not possible to generalize bankruptcy law across state lines.
[edit] Bankruptcy chapters
There are six types of bankruptcy under the Bankruptcy Code, located at Title 11 of the United States Code:
- Chapter 7 - basic liquidation for individuals and businesses
- Chapter 9 - municipal bankruptcy
- Chapter 11 - rehabilitation or reorganization, used primarily by business debtors, but sometimes by individuals with substantial debts and assets
- Chapter 12 - rehabilitation for family farmers and fishermen
- Chapter 13 - rehabilitation with a payment plan for individuals with a regular source of income
- Chapter 15 - ancillary and other international cases
The most common types of personal bankruptcy for individuals are Chapter 7 and Chapter 13. In Chapter 7, a debtor surrenders his or her non-exempt property to a bankruptcy trustee who then liquidates the property and distributes the proceeds to the debtor's unsecured creditors. In exchange, the debtor is entitled to a discharge of debt, except that the debtor will not be granted a discharge if he or she is guilty of certain types of inappropriate behavior (e.g. concealing records relating to financial condition) and except that some debts (e.g. spousal support, some taxes) will not be discharged even though the debtor is generally discharged from his or her debt. Many individuals in financial distress own only exempt property (e.g. clothes, household goods, an older car) and will not have to surrender any property to the trustee. The amount of property that a debtor may exempt varies from state to state. Chapter 7 relief is available only once in any eight year period. Generally, the rights of secured creditors to their collateral continues even though their debt is discharged (e.g. absent some arrangement by a debtor to surrender a car or "reaffirm" a debt, the creditor with a security interest in the debtor's car may repossess the car even if the debt to the creditor is discharged).
In Chapter 13, the debtor retains ownership and possession of all of his or her assets, but must devote some portion of his or her future income to repaying creditors, generally over a period of three to five years. The amount of payment and the period of the repayment plan depend upon a variety of factors, including the value of the debtor's property and the amount of a debtor's income and expenses. Secured creditors may be entitled to greater payment than unsecured creditors.
The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, Pub. L. No. 109-8, 119 Stat. 23 (April 20, 2005) ("BAPCPA"), substantially amended the Bankruptcy Code. Many provisions of BAPCPA were forcefully advocated by consumer lenders and were just as forcefully opposed by many consumer advocates, bankruptcy academics, bankruptcy judges, and bankruptcy lawyers. Its enactment followed nearly eight years of debate in Congress. Most of its provisions became effective on October 17, 2005. Upon signing the bill, President Bush stated:
"Under the new law, Americans who have the ability to pay will be required to pay back at least a portion of their debts. Those who fall behind their state's median income will not be required to pay back their debts. The new law will also make it more difficult for serial filers to abuse the most generous bankruptcy protections. Debtors seeking to erase all debts will now have to wait eight years from their last bankruptcy before they can file again. The law will also allow us to clamp down on bankruptcy mills that make their money by advising abusers on how to game the system."
Among its many changes to consumer bankruptcy law, BAPCPA enacted a "means test," which has made it more difficult for a small number of financially distressed individual debtors whose debts are primarily consumer debts to qualify for relief under Chapter 7 of the Bankruptcy Code. If a debtor does not qualify for relief under Chapter 7 of the Bankruptcy Code, the debtor may still seek relief under Chapter 13 of the Code. BAPCPA also requires individuals seeking bankruptcy relief to undertake credit counseling with approved counseling agencies prior to filing a bankruptcy petition and to undertake education in personal financial management from approved agencies prior to being granted a discharge of debts under either Chapter 7 or Chapter 13. Some studies of the operation of the credit counseling requirement suggest that it provides little benefit to debtors who receive the counseling because the only realistic option for many is to seek relief under the Bankruptcy Code.
[edit] 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.
[edit] Duties of trustees
Some of the duties of the trustee in bankruptcy are to:
- Review the file for any fraudulent preferences or reviewable transactions
- Chair meetings of creditors
- Sell any non-exempt assets
- Object to the bankrupt's discharge
- Distribute funds to creditors
[edit] 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.
[edit] 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 monthly 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 don’t, 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 in excess of $5,000 to a maximum of $75,000 (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.
In 2006, there were 98,450 personal insolvency filings in Canada: 79,218 bankruptcies and 19,232 consumer proposals.[3]
[edit] Bankruptcy in Europe
During 2004, new all-time high values have been reached in many European countries. In France, company insolvencies rose by more than 4%, in Austria by more than 10% and in Greece by even more than 20%. However the official bankruptcy (insolvency) statistics have only a limited explanation. The official statistics only show the number of insolvency cases. There is no indication of the value of the cases. This means that an increase in bankruptcy cases does not necessarily entail an increase in bad debt write-off rates for the economy as a whole.
There is a time delay between payment problems or written-off claims and when a business is actually declared bankrupt. In most cases, several months or even years pass between the supply of products on account and the start of respective bankruptcy proceedings.
Legal, tax-related but also cultural aspects lead to a further distortion of the explanation, especially when compared on an international basis. Two examples:
- In Austria, more than half of all bankruptcy proceedings in 2004 were not even opened due to insufficient funding to settle some outstanding amounts.
- In Spain, it is not economically profitable to open insolvency/bankruptcy proceedings against certain types of businesses and therefore, the number of insolvencies is quite low. For comparison: In France, more than 40,000 insolvency proceedings were opened in 2004, but under 600 were opened in Spain. At the same time the average bad debt write-off rate in France was 1.3% compared to Spain with 2.6%.
The insolvency numbers of private individuals also does not show the whole picture. Only a fractional amount of the households as heavily indebted decides to file for insolvency. Two of the main reasons for this are the stigma of declaring themselves insolvent and potential professional disadvantage.
Overview of Country Risk in Europe (risk to become in serious liquidity problems caused by late or non-payments, bankruptcy, fraud, etc.):
1. Finland (Rating: A) - 2. Sweden (Rating: A) - 3. Norway (B++) - 4. Denmark (B++) - 5. Iceland (B++) - 6. Ireland (B++) - 7. Switzerland (B+) - 8. France (B+) - 9. Austria (B) - 10. UK (B) - 11. Estonia (B) - 12. Italy (B) - 13. The Netherlands (B) - 14. Germany (B) - 15. Latvia (B) - 16. Hungary (B) - 17. Lithuania (B) - 18. Belgium (C++) - 19. Spain (C++) - 20. Poland (C++) - 21. Czech Republic (C+) - 22. Portugal (C)
(Source: www.europeanpayment.com)
[edit] 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 (insolvency) (administration order and administrative receivership). However, the term 'bankruptcy' is often used (incorrectly) when referring to companies in the media and in general conversation. Bankruptcy in Scotland is referred to as Sequestration.
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 increase the number of bankruptcy cases; initial Government statistics appear to bear this out. It remains to be seen whether the legislation will need reviewing if this remains the case.
There were 20,461 individual insolvencies in England and Wales in the fourth quarter of 2005 on a seasonally adjusted basis. This was an increase of 15.0% on the previous quarter and an increase of 36.8% on the same period a year ago.
This was made up of 13,501 bankruptcies, an increase of 15.9% on the previous quarter and an increase of 37.6% on the corresponding quarter of the previous year, and 6,960 Individual Voluntary Arrangements (IVA’s), an increase of 23.9% on the previous quarter and an increase of 117.1% on the corresponding quarter of the previous year.
[edit] References
- ^ Leviticus 25:8-54
- ^ See 140 Cong. Rec. S14, 461 (daily ed. Oct. 6, 1994).
- ^ "Insolvency in Canada in 2006": Office of the Superintendent of Bankruptcy (Industry Canada). Retrieved 2007-05-30.
- Born Losers: A History of Failure in America, by Scott A. Sandage (Harvard University Press, 2005).
- "Bankrupt your student loans and other discharge strategies," by Chuck Stewart, Ph.D., (Authorhouse, June 2006). ISBN
