Bankruptcy

"Bankrupt" redirects here. For the Phoenix album, see Bankrupt!

Notice of closure attached to the door of a Computer Shop outlet the day after its parent company declared "bankruptcy" (strictly, put into administration) in the United Kingdom

Bankruptcy is a legal status of a person or other entity that cannot repay the debts it owes to creditors. In most jurisdictions, bankruptcy is imposed by a court order, often initiated by the debtor.

Bankruptcy is not the only legal status that an insolvent person or other entity may have, and the term bankruptcy is therefore not a synonym for insolvency. In some countries, including the United Kingdom, bankruptcy is limited to individuals, and other forms of insolvency proceedings (such as liquidation and administration) are applied to companies. In the United States, bankruptcy is applied more broadly to formal insolvency proceedings. In France, the cognate French word banqueroute is used solely for cases of fraudulent bankruptcy, whereas the term faillite (cognate of "failure") is used for bankruptcy in accordance with the law.

Etymology

The word bankruptcy is derived from Italian banca rotta, meaning "broken bank", which may stem from a custom of breaking a moneychanger's bench or counter to signify his insolvency, or which may be only a figure of speech.

History

Main article: History of bankruptcy law

Failure of John Law's Mississippi Company led to French national bankruptcy in 1720.

In Ancient Greece, bankruptcy did not exist. If a man owed and he could not pay, he and his wife, children or servants were forced into "debt slavery", until the creditor recouped losses through their physical labour. Many city-states in ancient Greece limited debt slavery to a period of five years; 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. An exception to this rule was Athens, which by the laws of Solon forbade enslavement for debt; as a consequence, most Athenian slaves were foreigners (Greek or otherwise).

The Statute of Bankrupts of 1542 was the first statute under English law dealing with bankruptcy or insolvency. Bankruptcy is also documented in East Asia. According to al-Maqrizi, the Yassa of Genghis Khan contained a provision that mandated the death penalty for anyone who became bankrupt three times.

A failure of a nation to meet bond repayments has been seen on many occasions. Philip II of Spain had to declare four state bankruptcies in 1557, 1560, 1575 and 1596. According to Kenneth S. Rogoff, "Although the development of international capital markets was quite limited prior to 1800, we nevertheless catalog the various defaults of France, Portugal, Prussia, Spain, and the early Italian city-states. At the edge of Europe, Egypt, Russia, and Turkey have histories of chronic default as well."

Modern law and debt restructuring

The principal focus of modern insolvency legislation and business debt restructuring practices no longer rests on the elimination of insolvent entities, but on the remodeling of the financial and organizational structure of debtors experiencing financial distress so as to permit the rehabilitation and continuation of the business.

For private households, it is argued to be insufficient to merely dismiss debts after a certain period . It is important to assess the underlying problems and to minimize the risk of financial distress to re-occur. It has been stressed that debt advice, a supervised rehabilitation period, financial education and social help to find sources of income and to improve the management of household expenditures need to be equally provided during this period of rehabilitation (Refiner et al., 2003; Gerhardt, 2009; Frade, 2010). In most EU Member States, debt discharge is conditioned by a partial payment obligation and by a number of requirements concerning the debtor's behavior. In the United States (US), discharge is conditioned to a lesser extent. The spectrum is broad in the EU, with the UK coming closest to the US system (Reifner et al., 2003; Gerhardt, 2009; Frade, 2010). The Other Member States do not provide the option of a debt discharge. Spain, for example, passed a bankruptcy law (ley concurs) in 2003 which provides for debt settlement plans that can result in a reduction of the debt (maximally half of the amount) or an extension of the payment period of maximally five years (Gerhardt, 2009), but it does not foresee debt discharge.

It is almost impossible to discharge student loan debt by filing bankruptcy. Unlike most other debtors, the individual with student debt must give a series of reasons and tests (with steps) to prove that the debtor could not pay the debt. If the person were to file bankruptcy, he or she is normally encouraged to do so under Chapter 13.

In order to avoid bankruptcy, one could negotiate with the lender to lower monthly payments, or one could seek student debt consolidation. Student loan bankruptcy is considered a last resort. However, some borrowers find themselves being forced to file bankruptcy, as the lender refused to lower payments, or to lower/freeze interest rates (which grows the debt).

Fraud

Bankruptcy fraud is a white-collar 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 constitute 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. Bankruptcy fraud is a federal crime in the United States.

Bankruptcy fraud should be distinguished from strategic bankruptcy, which is not a criminal act since it is creates a real (not a fake) bankruptcy state. However, it may still work against the filer.

All assets must be disclosed in bankruptcy schedules whether or not the debtor believes the asset has a net value. This is because once a bankruptcy petition is filed, it is for the creditors, not the debtor, to decide whether a particular asset has value. The future ramifications of omitting assets from schedules can be quite serious for the offending debtor. In the United States, a closed bankruptcy may be reopened by motion of a creditor or the U.S. trustee if a debtor attempts to later assert ownership of such an "unscheduled asset" after being discharged of all debt in the bankruptcy. The trustee may then seize the asset and liquidate it for the benefit of the (formerly discharged) creditors. Whether or not a concealment of such an asset should also be considered for prosecution as fraud and/or perjury would then be at the discretion of the judge and/or U.S. Trustee.

By country

Argentina

In Argentina the national Act "24.522 de Concursos y Quiebras" regulates the Bankruptcy and the Reorganization of the individuals and companies, public entities are not included.

Australia

The Bankruptcy Act 1966 (Commonwealth) is the legislation that governs bankruptcy in Australia. Only individuals can become bankrupt; insolvent companies go into liquidation or administration. There are three "parts" of the act under which the vast majority of "acts of bankruptcy" fall. Part IV (Full Bankruptcy), Part IX Debt Agreements and Part X Personal Insolvency Agreements. Agreements refer specifically to arrangements between creditors and debtors, whereas Part IV relates to full bankruptcy and is generally synonymous with "bankruptcy".

A person or debtor can declare himself or herself bankrupt by lodging a debtor's petition with the Official Receiver, which is the Australian Financial Security Authority (AFSA). A person can also be made bankrupt after a creditor's petition results in the making of a sequestration order in the Federal Magistrates Court. To declare bankruptcy or for a creditors petition to be lodged, a minimum debt of $5,000 is required.

All bankrupts are required to lodge a Statement of Affairs document with AFSA, which includes important information about their assets and liabilities. A bankruptcy cannot be annulled until this document has been lodged.

Ordinarily, a Part IV bankruptcy lasts three years from the filing of the Statement of Affairs with AFSA. In the case of a debtor's petition, the Statement of Affairs is filed with the petition and the three-year period commences immediately. However, in the case of a creditor's petition, the Statement of Affairs will rarely be filed on the same day the court order is made. If the bankrupt fails to lodge the document within a certain period of time, he or she can be prosecuted and fined.

A Bankruptcy Trustee (in most cases this is the Official Receiver) is appointed to deal with all matters regarding the administration of the bankrupt estate. The Trustee's job includes notifying creditors of the estate and dealing with creditor inquiries; ensuring that the bankrupt complies with his or her obligations under the Bankruptcy Act; investigating the bankrupt's financial affairs; realising funds to which the estate is entitled under the Bankruptcy Act and distributing dividends to creditors if sufficient funds become available.

For the duration of their bankruptcy, all bankrupts have certain restrictions placed upon them under the Act. For example, a bankrupt must obtain the permission of his or her trustee to travel overseas. Failure to do so may result in the bankrupt being stopped at the airport by the Australian Federal Police. Additionally, a bankrupt is required to provide his or her trustee with details of income and assets. If the bankrupt does not comply with the Trustee's request to provide details of income, the trustee may have grounds to lodge an Objection to Discharge, which has the effect of extending the bankruptcy for a further five years.

The realisation of funds usually comes from two main sources: the bankrupt's assets and the bankrupt's wages. There are certain assets that are protected, referred to as "protected assets". These include household furniture and appliances, tools of the trade and vehicles up to a certain value. All other assets of value will be sold. If a house or car is above a certain value, the bankrupt can buy the interest back from the estate in order to keep the asset. If the bankrupt does not do this, the interest vests in the estate and the trustee is able to take possession of the asset and sell it.

The bankrupt will have to pay income contributions if his or her income is above a certain threshold. The threshold is indexed biannually in March and September, and varies according to the number of dependants the bankrupt has. The income contributions liability is calculated by halving the amount of income that exceeds the threshold. If the bankrupt fails to pay the contributions due, the trustee can issue a notice to garnishee the bankrupt's wages. If that is not possible, the Trustee may lodge an Objection to Discharge, effectively extending the bankruptcy for a further five years.

Bankruptcies can be annulled prior to the expiration of the normal three-year period if all debts are paid out in full. Sometimes a bankrupt may be able to raise enough funds to make an Offer of Composition to creditors, which would have the effect of paying the creditors some of the money they are owed. If the creditors accept the offer, the bankruptcy can be annulled after the funds are received.

After the bankruptcy is annulled or the bankrupt has been automatically discharged, the bankrupt's credit report status will be shown as "discharged bankrupt" for some years. The maximum number of years this information can be held is subject to the retention limits under the Privacy Act. How long such information will be present on a credit report may be less depending on the company issuing the report, but the report must cease to record that information based on the criteria in the Privacy Act.

Certain limited information on Bankruptcy Law in Australia can be found at the AFSA web site.

Brazil

In Brazil, the Bankruptcy Law (11.101/05) governs court-ordered or out-of-court receivership and bankruptcy and only applies to public companies (publicly traded companies) with the exception of financial institutions, credit cooperatives, consortia, supplementary scheme entities, companies administering health care plans, equity companies and a few other legal entities. It does not apply to state-run companies.

Current law covers three legal proceedings. The first one is bankruptcy itself ("Falência"). Bankruptcy is a court-ordered liquidation procedure for an insolvent business. The final goal of bankruptcy is to liquidate company assets and pay its creditors.

The second one is Court-ordered Restructuring (Recuperação Judicial). The goal is to overcome the business crisis situation of the debtor in order to allow the continuation of the producer, the employment of workers and the interests of creditors, leading, thus, to preserving company, its corporate function and develop economic activity. It's a court procedure required by the debtor which has been in business for more than two years and requires approval by a judge.

The Extrajudicial Restructuring (Recuperação Extrajudicial) is a private negotiation that involves creditors and debtors and, as with court-ordered restructuring, also has to be approved by courts.

Canada

Main article: Insolvency law of Canada

Bankruptcy, also referred to as insolvency in Canada, is governed by 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 overseeing that bankruptcies are administered in a fair and orderly manner by all licensed Trustees in Canada.

Trustees in bankruptcy, 1041 individuals licensed to administer insolvencies, bankruptcy and proposal estates and are governed by the Bankruptcy and Insolvency Act of Canada.

Bankruptcy is filed when a person or a company becomes insolvent and cannot pay their debts as they become due and if they have at least $1,000 in debt.

In 2011, the Superintendent of bankruptcy reported that trustees in Canada filed 127,774 insolvent estates. Consumer estates were the vast majority, with 122 999 estates. The consumer portion of the 2011 volume is divided into 77,993 bankruptcies and 45,006 consumer proposals. This represented a reduction of 8.9% from 2010. Commercial estates filed by Canadian trustees in 2011 4,775 estates, 3,643 bankruptcies and 1,132 Division 1 proposals. This represents a reduction of 8.6% over 2010.

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

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

Main article: Consumer bankruptcy in Canada

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 do not, 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 by both the creditors and the Court, the debtor makes the payments to the Proposal Administrator each month (or as otherwise stipulated in their proposal), and the general creditors are prevented from taking any further legal or collection action. If the proposal is rejected, the debtor is returned to his prior insolvent state and may have no alternative but to declare personal bankruptcy.

A consumer proposal can only be made by a debtor with debts to a maximum of $250,000 (not including the mortgage on their principal residence). If debts are greater than $250,000, the proposal must be filed under Division 1 of Part III of the Bankruptcy and Insolvency Act. An Administrator is required in the Consumer Proposal, and a Trustee in the Division I Proposal (these are virtually the same although the terms are not interchangeable). A Proposal Administrator is almost always 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.

China

Main article: Bankruptcy in China

The People's Republic of China legalized bankruptcy in 1986, and a revised law that was more expansive and complete was enacted in 2007.

Ireland

Bankruptcy in Ireland applies only to natural persons. Other insolvency processes including liquidation and examinership are used to deal with corporate insolvency ----.

Irish bankruptcy law has been the subject of significant comment, from both government sources and the media, as being in need of reform. Part 7 of the Civil Law (Miscellaneous Provisions) Act 2011 has started this process and the government has committed to further reform.

India

The Parliament of India in the first week of May,2016 swiftly passed Insolvency and Bankruptcy Code 2016 (New Code). Earlier a clear law on corporate bankruptcy did not exist even though individual bankruptcy laws have been in existence since 1874. The current law in force was enacted in 1920 called the Provincial Insolvency Act.

The legal definitions of the terms bankruptcy, insolvency, liquidation and dissolution are contested in the Indian legal system. There is no regulation or statute legislated upon bankruptcy which denotes a condition of inability to meet a demand of a creditor as is common in many other jurisdictions.

Winding up of companies is in the jurisdiction of the courts which can take a decade even after the company has actually been declared insolvent. On the other hand, supervisory restructuring at the behest of the Board of Industrial and Financial Reconstruction is generally undertaken using receivership by a public entity.

The Netherlands

Dutch bankruptcy law is governed by the Dutch Bankruptcy Code (Faillissementswet). The code covers three separate legal proceedings.

• The first is the bankruptcy (Faillissement). The goal of the bankruptcy is the liquidation of the assets of the company. The bankruptcy applies to individuals and companies.
• The second legal proceeding in the Faillissementswet is the Surseance van betaling. The Surseance van betaling only applies to companies. Its goal is to reach an agreement with the creditors of the company. Its is comparable to filing for protection against creditors.
• The third proceeding is the Schuldsanering. This proceeding is designed for individuals only and is the result of a court ruling. The judge appoints a monitor. The monitor is an independent third party who monitors the individual's ongoing business and decides about financial matters during the period of the "Schuldsanering". The individual can travel out of the country freely after the judge's decision on the case.

Russia

Main article: Insolvency law of Russia

Federal Law No. 127-FZ "On Insolvency (Bankruptcy)" dated 26 October 2002 (as amended) (the "Bankruptcy Act"), replacing the previous law in 1998, to better address the above problems and a broader failure of the action. Russian insolvency law is intended for a wide range of borrowers: individuals and companies of all sizes, with the exception of state-owned enterprises, government agencies, political parties and religious organizations. There are also special rules for insurance companies, professional participants of the securities market, agricultural organizations and other special laws for financial institutions and companies in the natural monopolies in the energy industry. Federal Law No. 40-FZ "On Insolvency (Bankruptcy)" dated 25 February 1999 (as amended) (the "Insolvency Law of Credit Institutions") contains special provisions in relation to the opening of insolvency proceedings in relation to the credit company. Insolvency Provisions Act, credit organizations used in conjunction with the provisions of the Bankruptcy Act.

Bankruptcy law provides for the following stages of insolvency proceedings: • Observation Control (nablyudeniye); • The economic recovery (finansovoe ozdorovleniye); • External control (vneshneye upravleniye); • Liquidation (konkursnoye proizvodstvo) and • Comprehensive Agreement (mirovoye soglasheniye).

The main face of the bankruptcy process is the insolvency officer (trustee in bankruptcy). At various stages of bankruptcy, he has to be determined: the temporary officer, external control, the receiver or administrative officer. During the bankruptcy trustee in bankruptcy (insolvency officer) has a decisive influence on the movement of assets (property) of the debtor - the debtor and has a key influence on the economic and legal aspects of its operations.

South Africa

Main article: South African insolvency law

Switzerland

Bankruptcy according to Salvation Army, Switzerland.

Main article: Insolvency law of Switzerland

Under Swiss law, bankruptcy can be a consequence of insolvency. It is a court-ordered form of debt enforcement proceedings that applies, in general, to registered commercial entities only. In a bankruptcy, all assets of the debtor are liquidated under the administration of the creditors, although the law provides for debt restructuring options similar to those under Chapter 11 of the U.S. Bankruptcy code.

Sweden

In Sweden, bankruptcy (Swedish: konkurs) is a formal process that may involve a company or individual. It is not the same as insolvency, which is inability to pay debts that should have been paid. A creditor or the company itself can apply for bankruptcy. An external bankruptcy manager will take over the company or the assets of the person, trying to sell as much as possible. A person or a company in bankruptcy can not access its assets (with some exceptions).

The formal bankruptcy process is rarely carried out for individuals. Creditors can claim money through the Enforcement Administration anyway, and creditors do not usually benefit from the bankruptcy of individuals because there are costs of a bankruptcy manager which has priority. Unpaid debts remain after bankruptcy for individuals. People who are deeply in debt can obtain a debt arrangement procedure (Swedish: skuldsanering). On application, they obtain a payment plan under which they pay as much as they can for five years, and then all remaining debts are cancelled. Debts that are derived from being subjected to a ban on business operations (issued by court, commonly for tax fraud and/or fraudulent business practices) or owed to a crime victim as compensation for damages, are exempted from this and like before this process was introduced in 2006 will remain lifelong. Debts that have not been claimed during a 3-10 year period will be cancelled. Often crime victims stop their claims after a few years since criminals often do not have job incomes and might be hard to locate, while banks make sure the claims are not cancelled. The most common reasons for personal insolvency in Sweden are illness, unemployment, divorce or company bankruptcy.

United Kingdom

Main articles: UK insolvency law, Liquidation, and Administration (insolvency)

Bankruptcy in the United Kingdom (in a strict legal sense) relates only to individuals (including sole proprietors) and partnerships. Companies and other corporations enter into differently named legal insolvency procedures: liquidation and administration (administration order and administrative receivership). However, the term 'bankruptcy' is often used when referring to companies in the media and in general conversation. Bankruptcy in Scotland is referred to as sequestration. To apply for bankruptcy in Scotland, an individual must have more than £1500 of debt.

A trustee in bankruptcy must be either an Official Receiver (a civil servant) or a licensed insolvency practitioner. Current law in England and Wales derives in large part from the Insolvency Act 1986. 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 was expected that the UK Government's liberalisation of the UK bankruptcy regime would increase the number of bankruptcy cases; initially cases increased, as the Insolvency Service statistics appear to bear out. Since 2009, the introduction of the Debt Relief Order has resulted in a dramatic fall in bankruptcies, the latest estimates for year 2014/15 being significantly less than 30,000 cases.

UK Bankruptcy statistics

Year	Bankruptcies	IVAs	Total
2004	35,989	10,752	46,741
2005	47,291	20,293	67,584
2006	62,956	44,332	107,288
2007	64,480	42,165	106,645
2008	67,428	39,116	106,544

Pensions

The UK bankruptcy law was changed in May 2000, effective May 29, 2000. Debtors may now retain occupational pensions while in bankruptcy, except in rare cases.

Proposed reform

The Government have updated legislation (2016) to streamline the application process for UK bankruptcy. UK residents now need to apply online for bankruptcy - there is an upront fee of £655. The process for residents of Northern Ireland differs - applicants must follow the older process of applying through the courts.

United States

Main article: Bankruptcy in the United States

In 2013, Detroit filed the largest municipal bankruptcy case in U.S. history.

Bankruptcy in the United States is a matter placed under federal jurisdiction by the United States Constitution (in Article 1, Section 8, Clause 4), which empowers Congress to enact "uniform Laws on the subject of Bankruptcies throughout the United States". The Congress has enacted statutes governing bankruptcy, primarily in the form of the Bankruptcy Code, located at Title 11 of the United States Code. Federal law is amplified by state law in some places where Federal law 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 dependent upon State law. One example: two states, Maryland and Virginia, which are adjoining states, have different personal exemption amounts that cannot be seized for payment of debts. This amount is the first $6,000 in property or cash in Maryland, but only the first $5,000 in Virginia. State law therefore plays a major role in many bankruptcy cases, and it is often not possible to generalize bankruptcy law across state lines.

Generally, a debtor declares bankruptcy to obtain relief from debt, and this is accomplished either through a discharge of the debt or through a restructuring of the debt. Generally, when a debtor files a voluntary petition, his or her bankruptcy case commences.

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; also known as straight bankruptcy; it is the simplest and quickest form of bankruptcy available
• Chapter 9: municipal bankruptcy; a federal mechanism for the resolution of municipal debts
• Chapter 11: rehabilitation or reorganization, used primarily by business debtors, but sometimes by individuals with substantial debts and assets; known as corporate bankruptcy, it is a form of corporate financial reorganisation which typically allows companies to continue to function while they follow debt repayment plans
• Chapter 12: rehabilitation for family farmers and fishermen;
• Chapter 13: rehabilitation with a payment plan for individuals with a regular source of income; enables individuals with regular income to develop a plan to repay all or part of their debts; also known as Wage Earner Bankruptcy
• Chapter 15: ancillary and other international cases; provides a mechanism for dealing with bankruptcy debtors and helps foreign debtors to clear debts.

The most common types of personal bankruptcy for individuals are Chapter 7 and Chapter 13. Whether a person qualifies for Chapter 7 or Chapter 13 is in part determined by income. As much as 65% of all U.S. consumer bankruptcy filings are Chapter 7 cases. Corporations and other business forms file under Chapters 7 or 11. Often called "straight bankruptcy" or "simple bankruptcy," it allows consumers to eliminate just about all of their debts over a period of three or four months. Typically, the only bills that survive a Chapter 7 are student loans, child support obligations, some tax bills and criminal fines. Credit cards, pay day loans, personal loans, medical bills, and just about all other bills are discharged.

Ninety-one percent of U.S. individuals who enter bankruptcy hire an attorney to file their Chapter 7 petitions. The typical cost of an attorney is $1,170.00. Alternatives to filing with an attorney are: filing pro se (that is, without an attorney, which requires an individual to fill out at least sixteen separate forms), hiring a non-lawyer petition preparer, or using online software to generate the petition.

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 some debt; however, 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 certain debts (e.g., spousal and child support, most student loans). 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, or the tools of their trade or profession) 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 (as noted above, Virginia and Maryland have a $1,000 difference.) 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. For example, 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.

The 2005 amendments to the Bankruptcy Code introduced the "means test" for eligibility for chapter 7. An individual who fails the means test will have his or her chapter 7 case dismissed or may have to convert his or her case to a case under chapter 13.

Generally, a trustee will sell most of the debtor's assets to pay off creditors. However, certain assets of the debtor are protected to some extent. For example, Social Security payments, unemployment compensation, and limited values of equity in a home, car, or truck, household goods and appliances, trade tools, and books are protected. However, these exemptions vary from state to state.

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.

Relief under Chapter 13 is available only to individuals with regular income whose debts do not exceed prescribed limits. If the debtor is an individual or a sole proprietor, the debtor is allowed to file for a Chapter 13 bankruptcy to repay all or part of the debts. Under this chapter, the debtor can propose a repayment plan in which to pay creditors over three to five years. If the monthly income is less than the state's median income, the plan will be for three years unless the court finds "just cause" to extend the plan for a longer period. If the debtor's monthly income is greater than the median income for individuals in the debtor's state, the plan must generally be for five years. A plan cannot exceed the five-year limitation.

In contrast to Chapter 7, the debtor in Chapter 13 may keep all of his or her property, whether or not exempt. If the plan appears feasible and if the debtor complies with all the other requirements, the bankruptcy court will typically confirm the plan and the debtor and creditors will be bound by its terms. Creditors have no say in the formulation of the plan other than to object to the plan, if appropriate, on the grounds that it does not comply with one of the Code's statutory requirements. Generally, the payments are made to a trustee who in turn disburses the funds in accordance with the terms of the confirmed plan.

When the debtor completes payments pursuant to the terms of the plan, the court will formally grant the debtor a discharge of the debts provided for in the plan. However, if the debtor fails to make the agreed upon payments or fails to seek or gain court approval of a modified plan, a bankruptcy court will often dismiss the case on the motion of the trustee. Pursuant to the dismissal, creditors will typically resume pursuit of state law remedies to the extent a debt remains unpaid.

In Chapter 11, the debtor retains ownership and control of assets and is re-termed a debtor in possession (DIP). The debtor in possession runs the day-to-day operations of the business while creditors and the debtor work with the Bankruptcy Court in order to negotiate and complete a plan. Upon meeting certain requirements (e.g., fairness among creditors, priority of certain creditors) creditors are permitted to vote on the proposed plan. If a plan is confirmed the debtor will continue to operate and pay its debts under the terms of the confirmed plan. If a specified majority of creditors do not vote to confirm a plan, additional requirements may be imposed by the court in order to confirm the plan. Debtors filing for Chapter 11 protection a second time are known informally as "Chapter 22" filers.

Chapter 7 and Chapter 13 are the efficient bankruptcy chapters often used by most individuals. The chapters which almost always apply to consumer debtors are chapter 7, known as a "straight bankruptcy", and chapter 13, which involves an affordable plan of repayment. An important feature applicable to all types of bankruptcy filings is the automatic stay. The automatic stay means that the mere request for bankruptcy protection automatically halts most lawsuits, repossessions, foreclosures, evictions, garnishments, attachments, utility shut-offs, and debt collection activity.

Exemptions

A Bankruptcy Exemption defines the property a debtor may retain and preserve through bankruptcy. Certain real and personal property can be exempted on "Schedule C" of a debtor's bankruptcy forms, and effectively be taken outside the debtor's bankruptcy estate. Bankruptcy Exemptions are available only to individuals filing bankruptcy. There are two alternative systems that can be used to "exempt" property from a bankruptcy estate, Federal Exemptions (available in some states but not all), and State Exemptions (which vary widely between states).

Individuals filing bankruptcy that claim exemptions must have all exemptions agreed upon by their bankruptcy judge (and/or courts) and by their creditors. This step usually requires the help of lawyers, in which the sector of Bankruptcy Law has grown to become a large section of the law field. That said, new software providers are beginning to develop products letting consumers operate without an attorney. This sector, the combination of law and finance, has attracted a large number of students in recent years, and has been given a large undertaking for growing the law sector.

Bankruptcy Abuse Prevention and Consumer Protection Act

The Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) 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. The enactment of BAPCPA followed nearly eight years of debate in Congress. According to the book, The Unwinding, Joe Biden, Chris Dodd, and Hillary Clinton helped pass this bill. Most of the law's 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.

— 

Advocates of BAPCPA claimed that its passage would reduce losses to creditors such as credit card companies, and that those creditors would then pass on the savings to other borrowers in the form of lower interest rates. Critics have argued that these claims turned out to be false. After BAPCPA passed, although credit card company losses decreased, prices charged to customers increased, and credit card company profits soared.

Among its many changes to consumer bankruptcy law, BAPCPA includes a "means test", which was intended to make it more difficult for a significant number of financially distressed individual debtors whose debts are primarily consumer debts to qualify for relief under Chapter 7 of the Bankruptcy Code. The "means test" is employed in cases where an individual with primarily consumer debts has more than the average annual income for a household of equivalent size, computed over a 180-day period prior to filing. If the individual must "take" the "means test", their average monthly income over this 180-day period is reduced by a series of allowances for living expenses and secured debt payments in a very complex calculation that may or may not accurately reflect that individual's actual monthly budget. If the results of the means test show no disposable income (or in some cases a very small amount) then the individual qualifies for Chapter 7 relief. If a debtor does not qualify for relief under Chapter 7 of the Bankruptcy Code, either because of the Means Test or because Chapter 7 does not provide a permanent solution to delinquent payments for secured debts, such as mortgages or vehicle loans, the debtor may still seek relief under Chapter 13 of the Code. A Chapter 13 plan often does not require repayment to general unsecured debts, such as credit cards or medical bills.

BAPCPA also requires individuals seeking bankruptcy relief to undertake credit counselling 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.

Europe

During 2004, the number of insolvencies reached all time highs in many European countries. In France, company insolvencies rose by more than 4%, in Austria by more than 10%, and in Greece by more than 20%. The increase in the number of insolvencies, however, does not indicate the total financial impact of insolvencies in each country because there is no indication of the size of each case. An increase in the number of bankruptcy cases does not necessarily entail an increase in bad debt write-off rates for the economy as a whole.

Bankruptcy statistics are also a trailing indicator. There is a time delay between financial difficulties and bankruptcy. In most cases, several months or even years pass between the financial problems and the start of bankruptcy proceedings. Legal, tax, and cultural issues may further distort bankruptcy figures, especially when comparing on an international basis. Two examples:

• In Austria, more than half of all potential bankruptcy proceedings in 2004 were not opened, due to insufficient funding.
• 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 for private individuals also do not show the whole picture. Only a fraction of heavily indebted households will decide to file for insolvency. Two of the main reasons for this are the stigma of declaring themselves insolvent and the potential business disadvantage.

Following the soar in insolvencies in the last decade, a number of European countries, such as France, Germany, Spain and Italy, began to revamp their bankruptcy laws in 2013. They modelled these new laws after the image of Chapter 11 of the U.S. Bankruptcy Code. Currently, the majority of insolvency cases have ended in liquidation in Europe rather than the businesses surviving the crisis. These new law models are meant to change this; lawmakers are hoping to turn bankruptcy into a chance for restructuring rather than a death sentence for the companies.

See also

• Bankruptcy Act
• Bankruptcy alternatives
• Creditor's rights
• Debt consolidation
• Debt relief
• Debt restructuring
• Debtor in possession
• Default
• DIP Financing
• Distressed securities
• Financial distress
• Individual voluntary arrangement
• Insolvency
• Judicial estoppel
• Liquidation
• Protected trust deed
• Sole Trader Insolvency (UK)
• Stalking Horse Agreement
• Tools of trade
• Turnaround ADR

Further reading

• Balleisen, Edward (2001). Navigating Failure: Bankruptcy and Commercial Society in Antebellum America. Chapel Hill: University of North Carolina Press. p. 322. ISBN 0-8078-2600-6. {{cite book}}: Cite has empty unknown parameter: |coauthors= (help)
• DePamphilis, Donald M. (2009). Mergers, Acquisitions, and Other Restructurings, 5th Edition. Elsevier, Academic Press. ISBN 978-0-12-374878-2. {{cite book}}: Cite has empty unknown parameter: |coauthors= (help)
• Mańko, Rafał. "Cross-border insolvency law in the EU" (PDF). Library Briefing. Library of the European Parliament. Retrieved 21 February 2013.
• Sandage, Scott A. (2006). Born Losers: A History of Failure in America. Cambridge, Mass.: Harvard University Press. ISBN 0-674-02107-X. {{cite book}}: Cite has empty unknown parameter: |coauthors= (help)
• Zywicki, Todd J. (2008). "Bankruptcy". In David R. Henderson (ed.) (ed.). Concise Encyclopedia of Economics (2nd ed.). Indianapolis: Library of Economics and Liberty. ISBN 978-0-86597-665-8. OCLC 237794267. {{cite encyclopedia}}: |editor= has generic name (help)

External links

• "Bankruptcy" . Encyclopædia Britannica. Vol. 3 (11th ed.). 1911.
• U.S. Federal Bankruptcy Courts
• Official U.S. Bankruptcy Statistics
• US Courts Bankruptcy Law
• Executive Office for United States Bankruptcy Trustees
• Cornell Bankruptcy Laws
• National Association of Consumer Bankruptcy Attorneys
• Bankruptcy Research Database (WebBRD)
• Website of the Insolvency Service in the UK
• Bankruptcy Statistics in Hong Kong
• Glossary of Consumer Proposal Terms
• Official Means Testing Information