Bankruptcy is a legally declared inability of
an individual or organisation to pay their creditors. A declared
state of bankruptcy can be requested or initiated by the bankrupt
individual or organisation, or it can be requested by creditors
in an effort to recoupe a proportion of what they are owed.
Bankruptcy allows the debtor to resolve his debts through the
division of his assets among his creditors. Additionally the declaration
of bankruptcy allows debtors to be discharged of most of the financial
obligations, after their assets are distributed, even if their debts
have not been paid in full. They are often then restricted in their
ability to own any assets for a period of time.
Bankruptcy is federal statutory law (Title 11 of the United States
Code) based on the Constitutional requirement for "uniform laws on
the subject of Bankruptcy throughout the United States." (Article
I, Section 8). Bankruptcy proceedings are undertaken in the United
States Bankruptcy Courts, part of the District Courts.
There are two basic types of proceedings that can either be entered
into voluntarily by the debtor or be started by any creditor by
filing a petition. Liquidation under a Chapter 7 filing is the most
common form of bankruptcy. Liquidation involves the appointment
of a trustee who collects the non-exempt property of the debtor,
sells it and distributes the proceeds to the creditors. Bankruptcy
under Chapter 11, Chapter 12, or Chapter 13 is more complex and
involves allowing the debtor to use future earnings to pay off creditors.
Some property is exempt from being sold to pay debts in a bankruptcy.
The law varies, but in many states, exempt property includes equity
in a home or car, tools of trade, and some personal effects. Liens
on property, such as a mortgage on a home, are generally not "discharged",
or cancelled, in a bankruptcy.
The primary purposes of the law 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
See also: Debt