Bankruptcy

Notice of closure stuck on the door of a computer store the day after its parent company, Granville Technology Group Ltd, declared 'bankruptcy' (strictly, put into administration - see text) in the UK.

Bankruptcy is a legally declared inability or impairment of ability of a individuals 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).

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 jurisidiction of the bankruptcy court for eventual distribution among their creditors. 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.

History

In the Hebrew Scriptures, Deuteronomy 15:1-6 declares that every seven years there shall be a release of debts. Also, The Law prescribed that one "Holy Year" or "Jubilee Year " should take place every half a century, when all debts are eliminated among Jews and all debt-slaves are freed, due to the heavenly command.

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.

Courses of Action for the Bankrupt

Bankruptcy is a legally declared inability or impairment of ability of an individual or organization to pay their creditors. In most cases personal bankruptcy is initiated by the bankrupt individual. Bankruptcy is a legal process that discharges most debts, but has the disadvantage of making it more difficult for an individual to borrow in the future. To avoid the negative impacts of personal bankruptcy, individuals in debt have a number of bankruptcy alternatives. These include taking no action, managing their own money, negotiating with creditors, consolidating debt, or entering into a formal proposal with their creditors.

Bankruptcy prevents a person's creditors from obtaining a Judgment against them. With a Judgment a Creditor can attempt to garnish wages or seize certain types of property. However, if a Debtor has no wages (because they are unemployed or retired) and has no property, they are "judgment proof," meaning a judgment would have no impact on their financial situation. Creditors typically do not initiate legal action against a Debtor with no assets, because it's unlikely they could collect against the judgment. If enough time passes, generally seven years in most jurisdictions, the debt is removed from the Debtor's Credit history. A Debtor with no assets or income cannot be garnished by a Creditor, and therefore the "Take No Action" approach may be the correct option, particularly if the Debtor does not expect to have a steady income or property a creditor could attempt to seize.

Debt is a result of spending more than one's income in a given period. To reduce debt, the most obvious solution is to reduce monthly spending to allow extra cash flow to service debt. This can be done by creating a personal budget and analyzing expenses to find areas to reduce expenses. Most people, when reviewing a written list of their monthly expenses, can find ways to reduce expenses. Common areas for expense reduction would include reducing food expenses by eating out less often, taking public transportation instead of driving a car, and eliminating enhanced telephone and cable television services.

Creditors understand that Bankruptcy is an option for debtors with excessive debt, so most creditors are willing to negotiate a settlement so that they receive a portion of their money, instead of risking losing everything in a bankruptcy. Negotiation is a viable alternative if the debtor has sufficient income, or has assets that can be liquidated so that the proceeds can be applied against the debt. Negotiation may also give the debtor some time to rebuild their finances.

Debt is a problem if the interest payments are greater than the debtor can afford. Debt consolidation typically involves borrowing from one lender (typically a Bank) at a low rate of interest sufficient funds to repay a number of higher interest rate debts (such as Credit Cards). By consolidating debts, the debtor replaces many payments to many different creditors with one monthly payment to one creditor, thereby simplifying their monthly budget. In addition, the lower interest rate means that more of the debtor's monthly payment is applied against the principal of the loan, resulting in faster debt repayment. It may be necessary to have a co-signor or other security, such as a car, if the borrow's credit is not sufficient on their own.

If the debtor cannot deal with their debt problems through personal budgeting, negotiation with creditors, or debt consolidation, the final bankruptcy alternative is a formal proposal or deal with the creditors. Different countries have different legal procedures for compromising debts. In the United States, a debtor can file a Chapter 13 Wager Earner Plan. The plan will typically last for up to five years, during which time the debtor makes payments that are distributed to their creditors. In Canada, a Consumer Proposal can be filed with the assistance of a government-licensed proposal administrator. Forty-five days after filing the proposal the creditors vote on the proposal, which is considered accepted if more than half of the creditors, by dollar value, vote to approve the proposal.

Bankruptcy fraud

Bankruptcy fraud is a crime. While difficult to generalize across jurisdictions, common criminal acts under bankruptcy statutes typically involve concealment of assets, conflicts of interest, false claims, 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.

Bankruptcy fraud should be distinguished from strategic bankruptcy, which is not a criminal act, but may work against the filer.

Bankruptcy Around the World

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. 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, and object to the bankrupt's discharge.

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, and to give such directions to the trustee as the creditors may see fit with reference to the administration of the estate.

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.

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.

Bankruptcy in Continental 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 offical bancruptcy (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 bancruptcy cases does not necessarily entail an increase in bad debt writte-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 acutally 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 disortion 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 40,0000 insolvency proceedings were opened in 2004 but under 600 in Spain. At the same time the average bad debt writte-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 declearing themselves insolvent and potential professional disadvantage.

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 quite unwise to generalize bankruptcy issues across state lines.

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.

Bibliography

• Frey, Martin. Introduction to Bankruptcy. (Thomson Delmar 2006). ISBN 1418040967
• Sandage, Scott. Born Losers: A History of Failure in America. (Harvard University Press, 2005). ISBN 067402107X
• Stewart, Chuck. "Bankrupt your student loans and other discharge strategies." (Authorhouse, June 2006). ISBN 1425928552

External links

• U.S. federal bankruptcy courts
• Executive Office for United States Bankruptcy Trustees
• National Association of Consumer Bankruptcy Attorneys (U.S.)
• LII Law about... Bankruptcy
• Website of the Insolvency Service in the UK
• Not-For-Profit Bankruptcy Information Centre in the UK

Credits

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