Bankruptcy

2006-05-19T22:06:00.000-07:00

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.

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 the means 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."

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 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.

The Bankruptcy Estate

Upon commencement of a bankruptcy, a bankruptcy estate is created. The bankruptcy estate (sometimes called "the estate") is a legal entity separate and distinct from the debtor, the creditors, or the trustee. Because the estate is not a real person, a trustee is appointed by the office of the U.S. Trustee to represent the estate and to make decisions on its behalf. It is not strictly correct to say that the trustee represents the creditors, though the creditors often benefit from actions by the trustee. With few exceptions, all the assets of the debtor transfer to the estate when the petition is filed. Exceptions to this rule include property to which the debtor holds only legal (as opposed to equitable) title. The estate also owns certain property acquired by the debtor within 180 days, including property received by inheritance or devise or as the result of a divorce judgment or a marital settlement agreement. In some circumstances, the trustee has the right to recover property transferred by the debtor or money paid by the debtor to a creditor before the case is filed.