Bankruptcy

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

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.

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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 property available for payment.

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. During the pendency of a bankruptcy proceeding, the "Debtor" is protected from extra-Bankruptcy action by creditors by a legally imposed "stay."

History

This word is formed from the ancient Latin bancus a bench, or table, and ruptus, broken. Bank originally signified a bench, which the first bankers had in the public places, in markets, fairs, etc. on which they told their money, wrote their bills of exchange, etc. Hence, when a banker failed, they 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 rather choose 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 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 Canada


Main article: Bankruptcy in Canada

Bankruptcy in Canada is laid out by federal law, set out 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.

Duties of Trustees

Some of the duties of the trustee in bankruptcy are to:

  • Prepare the bankruptcy documents that assign the person into bankruptcy
  • Review the file for any fraudulent preferences or reviewable transactions
  • Chair meetings of creditors
  • Sell any available assets
  • Perform counselling for the debtors
  • Recommend whether the bankrupt should be discharged.

Creditors' Meetings

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

Bankruptcy Reform

The Bankruptcy and Insolvency Act was last updated in 1997. On June 3, 2005 the government introduced insolvency reform legislation in parliament. As of August 2005 it is not known if or when this proposed legislation will become law.

Bankruptcy in the United Kingdom


Main article: 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 and administrative receivership. However, the term 'bankruptcy' is often used (incorrectly) when referring to companies in the media and in general conversation etc.

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 massively increase the number of bankruptcy cases; initial Government statistics appear to bear this out. It remains to be seen whether the leash has been loosened too far and whether the legislation will need reviewing if the system becomes too overheated with debt-dumping debtors.

Bankruptcy in the United States


Main article: 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.

Bibliography

Born Losers: A History of Failure in America, by Scott A. Sandage (Harvard University Press, 2005).

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