Bankruptcy, legal proceeding in which a debtor declares his or her inability to pay consumer or business debts as they become due. Debtors may seek a discharge from continuing personal liability for unsecured debts or they may attempt to reorganize financially by seeking an extended period of time in which to pay all or a proportion of their indebtedness.
CURRENT PRACTICES
The U.S. Constitution empowers Congress “to establish ... uniform laws on the subject of bankruptcies throughout the United States” (Article I, Section 8). This grant of power to Congress has been interpreted to preclude the states from including effective individual bankruptcy discharges in their laws. The current federal bankruptcy legislation is the Bankruptcy Reform Act of 1978, as amended in 1984 and 1986.
More than 90 percent of bankruptcy proceedings are voluntary. They are initiated by the debtor, who files a petition with the appropriate federal court. A bankruptcy trustee then collects and liquidates the debtor's nonexempt property for the benefit of the unsecured creditors. Secured creditors are not affected by bankruptcy liquidations because they have taken collateral (such as a home mortgage) to ensure repayment of debts. Once distribution to unsecured creditors occurs, the court discharges the debtor unless that person's prior behavior justifies denying the discharge or granting it with certain specific statutory exceptions. In order to limit or deny the discharge, the creditor must prove that the debtor has obtained credit by fraudulent practices or has engaged in other prohibited behavior. Creditors can file an involuntary bankruptcy petition against a debtor, alleging that the debtor is “generally not paying” debts, but this type of proceeding rarely occurs.
The Bankruptcy Code allows both consumer and business debtors to attempt financial reorganization instead of liquidation of nonexempt assets. A debtor who selects this alternative proposes a reorganization plan for consideration by the affected creditors and the court. For individuals who use Chapter 13 reorganization proceedings, a typical plan requires payment from the debtor's future income. Businesses that wish to continue their operations, sometimes in a modified form, usually opt for Chapter 11 reorganization proceedings. Their proposals may combine payments from sales of some business assets with income from future business operations. Stockholder interests may be restructured in addition to modifying payment requirements for their secured and unsecured debts.
CURRENT PRACTICES
The U.S. Constitution empowers Congress “to establish ... uniform laws on the subject of bankruptcies throughout the United States” (Article I, Section 8). This grant of power to Congress has been interpreted to preclude the states from including effective individual bankruptcy discharges in their laws. The current federal bankruptcy legislation is the Bankruptcy Reform Act of 1978, as amended in 1984 and 1986.
More than 90 percent of bankruptcy proceedings are voluntary. They are initiated by the debtor, who files a petition with the appropriate federal court. A bankruptcy trustee then collects and liquidates the debtor's nonexempt property for the benefit of the unsecured creditors. Secured creditors are not affected by bankruptcy liquidations because they have taken collateral (such as a home mortgage) to ensure repayment of debts. Once distribution to unsecured creditors occurs, the court discharges the debtor unless that person's prior behavior justifies denying the discharge or granting it with certain specific statutory exceptions. In order to limit or deny the discharge, the creditor must prove that the debtor has obtained credit by fraudulent practices or has engaged in other prohibited behavior. Creditors can file an involuntary bankruptcy petition against a debtor, alleging that the debtor is “generally not paying” debts, but this type of proceeding rarely occurs.
The Bankruptcy Code allows both consumer and business debtors to attempt financial reorganization instead of liquidation of nonexempt assets. A debtor who selects this alternative proposes a reorganization plan for consideration by the affected creditors and the court. For individuals who use Chapter 13 reorganization proceedings, a typical plan requires payment from the debtor's future income. Businesses that wish to continue their operations, sometimes in a modified form, usually opt for Chapter 11 reorganization proceedings. Their proposals may combine payments from sales of some business assets with income from future business operations. Stockholder interests may be restructured in addition to modifying payment requirements for their secured and unsecured debts.
