1. Bankruptcy and Insolvency Law Generally
Bankruptcy and involvency law has to do with what happens when a someone cannot pay their debts as they come due.
Some definitions will be useful:
- A "debtor" is someone who has borrowed money from someone else.
- A "creditor" is someone who has loaned money to the debtor.
- "Insolvent" means that someone cannot pay their debts as they come due. This word simply describes the situation in the real world and does not mean that any legal proceeding has started.
- "Bankrupt" means that a court has determined that somone cannot pay their debts as they come due. Typically, that determination comes along with some actions to resolve the insolvency.
- "Liquidation" usually means sale of someone's assets to be applied against debt.
- "Winding up" usually means the orderly ending a company's operations and settling of its finances.
- "Dissolution" usually means the ending of the legal existence of the company. From a legal perspective, it is like death is for an individual, except that liquidation and winding up usually happen before dissolution for a company, where the comparable processes for an individual (distributing his or her assets to heirs or in accordance with a will) usually happen after death.
- Each of the terms "liquidation," "winding up," and "dissolution" is often used loosely to mean the entire process of selling off assets, ending a company's operations and finances in an orderly manner, and ending the legal existence of the company.
- Each of the terms "liquidation," "winding up," and "dissolution" is used differently in different jurisdictions. For example, in Britain, the term "liquidation" refers to a specific process by which a company is declared bankrupt and its assets are sold to pay off creditors (which is comparable to one kind of bankruptcy in the U.S.).
- "Administration" is a term used differently in different countires, but with a partially common meaning that the insolvent person will undergo some form of management by the court (or its appointee) instead of liquidation. In Britain, administration is the name of a formal process where the court takes control of an insolvent company in order to manage it in th einterests of its creditors. In the U.S., the comparable concept is reorganization in bankruptcy.
- A "receiver" is a person to whom a court gives control of an insolvent person's assets in order to protect the creditors. Similar concepts are foudn in many countries' bankruptcy laws and might or might not use the term "receiver." In Britain, for example, a court in an administration action may establish an "administrative receivership." In the U.S., a trustee in bankruptcy is a similar concept, but is not called a receiver.
| Law Knols on Bankruptcy Law in the U.S. |
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2. Bankruptcy in the U.S.
More information > Bankruptcy Law In the U.S.
Generally, debtors take on debts to creditors under state law. When they become insolvent, the seek relief from those debts under the federal Bankruptcy Code. The U.S. Constitution authorizes Congress to pass "uniform Laws on the subject of Bankruptcies." In doing so, the Congress set up special bankruptcy courts as adjunct to regulsr U.S. District Courts. The bankruptcy courts handle most bankruptcy cases.
Bankruptcy cases in the U.S. are filed under one of several chapters of the Bankruptcy Code. The differences in the chapters centers around who the debtor is and what kind of relief the chapter will give. Here are the major kinds:
- Chapter 7: liquidation for individuals and businesses
- Chapter 11: reorganization for businesses
- Chapter 12: reorganization for family farmers and fishers
- Chapter 13: reorganization for individuals
At a high level, there are two kinds of bankruptcy cases: voluntary ones, where the debtor files to get protection from the bakruptcy court, and involuntary ones, where the creditor files to get help from the bankruptcy court in recovering money owed to it. When a bankruptcy case starts, the court issues an "automatic stay" that prohibits any other court actions trying to recover money from the debtor.
Bankruptcy law then creates a "bankruptcy estate," which basically represents all of the property that the bankrupt debtor has. The court will try to use the bankruptcy estate to satisfy the creditors. Much of the case may boil down to the various people trying to get things into an out of the bankruptcy estate. Examples:
- Creditors with security interests against particular property (such as liens on cars or mortgages on homes) will foreclose on those security interests, which takes them out of the bankruptcy estate.
- A bankruptcy trustee or a creditor may try to bring an amount that the debtor previously paid back into the bankruptcy estate through a claim called an "avoidance action." There are three main kinds of avoidance actions: preferences to recover any amount paid within the last 90 days or so; fraudulent transfer actions to recover any amount paid with the intent of sheltering it fro bankruptcy; and strong arm actions to reocver any amoutn that the debtor could have recovered.
- The debtor will be able to remove certain property from the bankruptcy estate by claiming it as exempt property. The biggest exemption is usually for a home that the debtor owns and lives in.
Once the debtor's property has been distributed to creditors, then the debtor may receive a discharge. The discharge relieves the debtor of the obligation to pay the debt. Depending on the type of bankruptcy case, the debtor may receive a full discharge, partial discharge, or no discharge.
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3. Bankruptcy Law Outside the U.S.
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