Bankruptcy

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Notice of closure attached to the door of a Computer Shop outlet the day after its parent company declared "bankruptcy" (strictly, put into administration) in the United Kingdom Bankrupt computer store.jpg
Notice of closure attached to the door of a Computer Shop outlet the day after its parent company declared "bankruptcy" (strictly, put into administration) in the United Kingdom

Bankruptcy is a legal process through which people or other entities who cannot repay debts to creditors may seek relief from some or all of their debts. In most jurisdictions, bankruptcy is imposed by a court order, often initiated by the debtor.

A legal person in legal context typically is a person —whether human or non-human—that is recognized as having certain privileges and obligations such as the legal capacity to enter into contracts, to sue, and to be sued.

A creditor is a party that has a claim on the services of a second party. It is a person or institution to whom money is owed. The first party, in general, has provided some property or service to the second party under the assumption that the second party will return an equivalent property and service. The second party is frequently called a debtor or borrower. The first party is called the creditor, which is the lender of property, service, or money.

A court order is an official proclamation by a judge that defines the legal relationships between the parties to a hearing, a trial, an appeal or other court proceedings. Such ruling requires or authorizes the carrying out of certain steps by one or more parties to a case. A court order must be signed by a judge; some jurisdictions may also require it to be notarized.

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Bankruptcy is not the only legal status that an insolvent person may have, and the term bankruptcy is therefore not a synonym for insolvency. In some countries, such as the United Kingdom, bankruptcy is limited to individuals; other forms of insolvency proceedings (such as liquidation and administration) are applied to companies. In the United States, bankruptcy is applied more broadly to formal insolvency proceedings. In France, the cognate French word banqueroute is used solely for cases of fraudulent bankruptcy, whereas the term faillite (cognate of "failure") is used for bankruptcy in accordance with the law. [1]

Insolvency is the state of being unable to pay the money owed, by a person or company, on time; those in a state of insolvency are said to be insolvent. There are two forms: cash-flow insolvency and balance-sheet insolvency.

United Kingdom Country in Europe

The United Kingdom (UK), officially the United Kingdom of Great Britain and Northern Ireland, and sometimes referred to as Britain, is a sovereign country located off the north-western coast of the European mainland. The United Kingdom includes the island of Great Britain, the north-eastern part of the island of Ireland, and many smaller islands. Northern Ireland is the only part of the United Kingdom that shares a land border with another sovereign state, the Republic of Ireland. Apart from this land border, the United Kingdom is surrounded by the Atlantic Ocean, with the North Sea to the east, the English Channel to the south and the Celtic Sea to the south-west, giving it the 12th-longest coastline in the world. The Irish Sea lies between Great Britain and Ireland. With an area of 242,500 square kilometres (93,600 sq mi), the United Kingdom is the 78th-largest sovereign state in the world. It is also the 22nd-most populous country, with an estimated 66.0 million inhabitants in 2017.

Liquidation is the process in accounting by which a company is brought to an end in the United Kingdom, Republic of Ireland and United States. The assets and property of the company are redistributed. Liquidation is also sometimes referred to as winding-up or dissolution, although dissolution technically refers to the last stage of liquidation. The process of liquidation also arises when customs, an authority or agency in a country responsible for collecting and safeguarding customs duties, determines the final computation or ascertainment of the duties or drawback accruing on an entry.

Etymology

The word bankruptcy is derived from Italian banca rotta, meaning "broken bench", which may stem from a widespread custom in the Republic of Genoa of breaking a moneychanger's bench or counter to signify their insolvency, or which may be only a figure of speech. [2] [3] [4] [5] [6]

Republic of Genoa former state on the Apennine Peninsula between 1005–1797

The Republic of Genoa was an independent state from 1005 to 1797 in Liguria on the northwestern Italian coast, incorporating Corsica from 1347 to 1768, and numerous other territories throughout the Mediterranean.

History

Failure of John Law's Mississippi Company led to French national bankruptcy in 1720. John Law cartoon (1720).png
Failure of John Law's Mississippi Company led to French national bankruptcy in 1720.

In Ancient Greece, bankruptcy did not exist. If a man owed and he could not pay, he and his wife, children or servants were forced into "debt slavery", until the creditor recouped losses through their physical labour. Many city-states in ancient Greece limited debt slavery to a period of five years; 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. An exception to this rule was Athens, which by the laws of Solon forbade enslavement for debt; as a consequence, most Athenian slaves were foreigners (Greek or otherwise).

Ancient Greece Civilization belonging to an early period of Greek history

Ancient Greece was a civilization belonging to a period of Greek history from the Greek Dark Ages of the 12th–9th centuries BC to the end of antiquity. Immediately following this period was the beginning of the Early Middle Ages and the Byzantine era. Roughly three centuries after the Late Bronze Age collapse of Mycenaean Greece, Greek urban poleis began to form in the 8th century BC, ushering in the Archaic period and colonization of the Mediterranean Basin. This was followed by the period of Classical Greece, an era that began with the Greco-Persian Wars, lasting from the 5th to 4th centuries BC. Due to the conquests by Alexander the Great of Macedon, Hellenistic civilization flourished from Central Asia to the western end of the Mediterranean Sea. The Hellenistic period came to an end with the conquests and annexations of the eastern Mediterranean world by the Roman Republic, which established the Roman province of Macedonia in Roman Greece, and later the province of Achaea during the Roman Empire.

Manual labour physical work done by people

Manual labour or manual work is physical work done by people, most especially in contrast to that done by machines, and to that done by working animals. It is most literally work done with the hands, and, by figurative extension, it is work done with any of the muscles and bones of the body. For most of human prehistory and history, manual labour and its close cousin, animal labour, have been the primary ways that physical work has been accomplished. Mechanisation and automation, which reduce the need for human and animal labour in production, have existed for centuries, but it was only starting in the 18th and 19th centuries that they began to significantly expand and to change human culture. To be implemented, they require that sufficient technology exist and that its capital costs be justified by the amount of future wages that they will obviate. Semi-automation is an alternative to worker displacement that combines human labour, automation, and computerization to leverage the advantages of both man and machine.

Polis ancient Greek social and political organisation

Polis, plural poleis literally means city in Greek. It can also mean a body of citizens. In modern historiography, polis is normally used to indicate the ancient Greek city-states, like Classical Athens and its contemporaries, and thus is often translated as "city-state". These cities consisted of a fortified city centre (asty) built on an acropolis or harbor and controlled surrounding territories of land (khôra).

The Statute of Bankrupts of 1542 was the first statute under English law dealing with bankruptcy or insolvency. [7] Bankruptcy is also documented in East Asia. According to al-Maqrizi, the Yassa of Genghis Khan contained a provision that mandated the death penalty for anyone who became bankrupt three times.

English law legal system of England and Wales

English law is the common law legal system of England and Wales, comprising mainly criminal law and civil law, each branch having its own courts and procedures.

East Asia Subregion of Asia

East Asia is the eastern subregion of Asia, defined in either geographical or ethno-cultural terms. China, Japan, Korea, and Vietnam belong to the East Asian cultural sphere. Geographically and geopolitically, the region includes China, Hong Kong, Macau, Taiwan, Japan, Mongolia, North Korea, and South Korea.

Taqi al-Din Abu al-Abbas Ahmad ibn 'Ali ibn 'Abd al-Qadir ibn Muhammad al-Maqrizi (1364–1442) was an Egyptian Arab historian more commonly known as al-Maqrizi or Makrizi. Although he was "a Mamluk-era historian and himself a Sunni Muslim, he is remarkable in this context for his unusually keen interest in the Isma'ili Fatimid dynasty and its role in Egyptian history."

A failure of a nation to meet bond repayments has been seen on many occasions. Philip II of Spain had to declare four state bankruptcies in 1557, 1560, 1575 and 1596. According to Kenneth S. Rogoff, "Although the development of international capital markets was quite limited prior to 1800, we nevertheless catalog the various defaults of France, Portugal, Prussia, Spain, and the early Italian city-states. At the edge of Europe, Egypt, Russia, and Turkey have histories of chronic default as well." [8]

Philip II of Spain 16th-century King of Spain who became King of England by marriage

Philip II was King of Castile and Aragon (1556–98), King of Portugal, King of Naples and Sicily, and jure uxoris King of England and Ireland. He was also Duke of Milan. From 1555 he was lord of the Seventeen Provinces of the Netherlands.

A sovereign default is the failure or refusal of the government of a sovereign state to pay back its debt in full. Cessation of due payments may either be accompanied by formal declaration (repudiation) of a government not to pay its debts, or it may be unannounced. A credit rating agency will take into account in its gradings capital, interest, extraneous and procedural defaults, failures to abide by the terms of bonds or other debt instruments. Countries have at times escaped the real burden of some of their debt through inflation. This is not "default" in the usual sense because the debt is honored, albeit with currency of lesser real value. Sometimes governments devalue their currency. This can be done by printing more money to apply toward their own debts, or by ending or altering the convertibility of their currencies into precious metals or foreign currency at fixed rates. Harder to quantify than an interest or capital default, this often is defined as an extraneous or procedural default (breach) of terms of the contracts or other instruments.

France Republic with mainland in Europe and numerous oversea territories

France, officially the French Republic, is a country whose territory consists of metropolitan France in Western Europe and several overseas regions and territories. The metropolitan area of France extends from the Mediterranean Sea to the English Channel and the North Sea, and from the Rhine to the Atlantic Ocean. It is bordered by Belgium, Luxembourg and Germany to the northeast, Switzerland and Italy to the east, and Andorra and Spain to the south. The overseas territories include French Guiana in South America and several islands in the Atlantic, Pacific and Indian oceans. The country's 18 integral regions span a combined area of 643,801 square kilometres (248,573 sq mi) and a total population of 67.3 million. France, a sovereign state, is a unitary semi-presidential republic with its capital in Paris, the country's largest city and main cultural and commercial centre. Other major urban areas include Lyon, Marseille, Toulouse, Bordeaux, Lille and Nice.

Modern law and debt restructuring

The principal focus of modern insolvency legislation and business debt restructuring practices no longer rests on the elimination of insolvent entities, but on the remodeling of the financial and organizational structure of debtors experiencing financial distress so as to permit the rehabilitation and continuation of the business.

For private households, some argue that it is insufficient to merely dismiss debts after a certain period [ citation needed ]. It is important to assess the underlying problems and to minimize the risk of financial distress to re-occur. It has been stressed that debt advice, a supervised rehabilitation period, financial education and social help to find sources of income and to improve the management of household expenditures must be equally provided during this period of rehabilitation (Refiner et al., 2003; Gerhardt, 2009; Frade, 2010). In most EU Member States, debt discharge is conditioned by a partial payment obligation and by a number of requirements concerning the debtor's behavior. In the United States (US), discharge is conditioned to a lesser extent. The spectrum is broad in the EU, with the UK coming closest to the US system (Reifner et al., 2003; Gerhardt, 2009; Frade, 2010). The Other Member States do not provide the option of a debt discharge. Spain, for example, passed a bankruptcy law (ley concurs) in 2003 which provides for debt settlement plans that can result in a reduction of the debt (maximally half of the amount) or an extension of the payment period of maximally five years (Gerhardt, 2009), but it does not foresee debt discharge. [9]

In the US, it is very difficult to discharge federal or federally guaranteed student loan debt by filing bankruptcy. [10] Unlike most other debts, those student loans may be discharged only if the person seeking discharge establishes specific grounds for discharge under the Brunner test, [11] under which the court evaluates three factors:

Even if a debtor proves all three elements, a court may permit only a partial discharge of the student loan. Student loan borrowers may benefit from restructuring their payments through a Chapter 13 bankruptcy repayment plan, but few qualify for discharge of part or all of their student loan debt. [12]

Fraud

Bankruptcy fraud is a white-collar crime. While difficult to generalize across jurisdictions, common criminal acts under bankruptcy statutes typically involve concealment of assets, concealment or destruction of documents, conflicts of interest, fraudulent claims, false statements or declarations, and fee fixing or redistribution arrangements. Falsifications on bankruptcy forms often constitute 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. [13] [14] Bankruptcy fraud is a federal crime in the United States. [15]

Bankruptcy fraud should be distinguished from strategic bankruptcy , which is not a criminal act since it creates a real (not a fake) bankruptcy state. However, it may still work against the filer.

All assets must be disclosed in bankruptcy schedules whether or not the debtor believes the asset has a net value. This is because once a bankruptcy petition is filed, it is for the creditors, not the debtor, to decide whether a particular asset has value. The future ramifications of omitting assets from schedules can be quite serious for the offending debtor. In the United States, a closed bankruptcy may be reopened by motion of a creditor or the U.S. trustee if a debtor attempts to later assert ownership of such an "unscheduled asset" after being discharged of all debt in the bankruptcy. The trustee may then seize the asset and liquidate it for the benefit of the (formerly discharged) creditors. Whether or not a concealment of such an asset should also be considered for prosecution as fraud or perjury would then be at the discretion of the judge or U.S. Trustee.

By country

Argentina

In Argentina the national Act "24.522 de Concursos y Quiebras" regulates the Bankruptcy and the Reorganization of the individuals and companies, public entities are not included.

Australia

In Australia, bankruptcy is a status which applies to individuals and is governed by the federal Bankruptcy Act 1966. [16] Companies do not go bankrupt but rather go into liquidation or administration, which is governed by the federal Corporations Act 2001 . [17]

If a person commits an act of bankruptcy, then a creditor can apply to the Federal Circuit Court or the Federal Court for a sequestration order. [18] Acts of bankruptcy are defined in the legislation, and include the failure to comply with a bankruptcy notice. [19] A bankruptcy notice can be issued where, among other cases, a person fails to pay a judgment debt. [20] A person can also seek to have themself declared bankrupt by lodging a debtor's petition with the "Official Receiver", [21] which is the Australian Financial Security Authority (AFSA). [22]

To declare bankruptcy or for a creditor to lodge a petition, the debt must be at least $5,000. [20]

All bankrupts must lodge a Statement of Affairs document with AFSA, which includes important information about their assets and liabilities. A bankruptcy cannot be annulled until this document has been lodged.

Ordinarily, a bankruptcy lasts three years from the filing of the Statement of Affairs with AFSA. [23]

A Bankruptcy Trustee (in most cases, the Official Receiver) is appointed to deal with all matters regarding the administration of the bankrupt estate. The Trustee's job includes notifying creditors of the estate and dealing with creditor inquiries; ensuring that the bankrupt complies with their obligations under the Bankruptcy Act; investigating the bankrupt's financial affairs; realising funds to which the estate is entitled under the Bankruptcy Act and distributing dividends to creditors if sufficient funds become available.

For the duration of their bankruptcy, all bankrupts have certain restrictions placed upon them. For example, a bankrupt must obtain the permission of their trustee to travel overseas. Failure to do so may result in the bankrupt being stopped at the airport by the Australian Federal Police. Additionally, a bankrupt is required to provide their trustee with details of income and assets. If the bankrupt does not comply with the Trustee's request to provide details of income, the trustee may have grounds to lodge an Objection to Discharge, which has the effect of extending the bankruptcy for a further five years.

The realisation of funds usually comes from two main sources: the bankrupt's assets and the bankrupt's wages. There are certain assets that are protected, referred to as protected assets. These include household furniture and appliances, tools of the trade and vehicles up to a certain value. All other assets of value are sold. If a house or car is above a certain value, the bankrupt can buy the interest back from the estate in order to keep the asset. If the bankrupt does not do this, the interest vests in the estate and the trustee is able to take possession of the asset and sell it.

The bankrupt must pay income contributions if their income is above a certain threshold. If the bankrupt fails to pay, the trustee can issue a notice to garnishee the bankrupt's wages. If that is not possible, the Trustee may seek to extend the bankruptcy for a further five years.

Bankruptcies can be annulled prior to the expiration of the normal three-year period if all debts are paid out in full. Sometimes a bankrupt may be able to raise enough funds to make an Offer of Composition to creditors, which would have the effect of paying the creditors some of the money they are owed. If the creditors accept the offer, the bankruptcy can be annulled after the funds are received.

After the bankruptcy is annulled or the bankrupt has been automatically discharged, the bankrupt's credit report status is shown as "discharged bankrupt" for some years. The maximum number of years this information can be held is subject to the retention limits under the Privacy Act. How long such information is on a credit report may be shorter, depending on the issuing company, but the report must cease to record that information based on the criteria in the Privacy Act.

Brazil

In Brazil, the Bankruptcy Law (11.101/05) governs court-ordered or out-of-court receivership and bankruptcy and only applies to public companies (publicly traded companies) with the exception of financial institutions, credit cooperatives, consortia, supplementary scheme entities, companies administering health care plans, equity companies and a few other legal entities. It does not apply to state-run companies.

Current law covers three legal proceedings. The first one is bankruptcy itself ("Falência"). Bankruptcy is a court-ordered liquidation procedure for an insolvent business. The final goal of bankruptcy is to liquidate company assets and pay its creditors.

The second one is Court-ordered Restructuring (Recuperação Judicial). The goal is to overcome the business crisis situation of the debtor in order to allow the continuation of the producer, the employment of workers and the interests of creditors, leading, thus, to preserving company, its corporate function and develop economic activity. It's a court procedure required by the debtor which has been in business for more than two years and requires approval by a judge.

The Extrajudicial Restructuring (Recuperação Extrajudicial) is a private negotiation that involves creditors and debtors and, as with court-ordered restructuring, also must be approved by courts. [24]

Canada

Bankruptcy, also referred to as insolvency in Canada, is governed by the Bankruptcy and Insolvency Act and is applicable to businesses and individuals, for example, Target Canada, the Canadian subsidiary of the Target Corporation, the second-largest discount retailer in the United States filed for bankruptcy in January 15, 2015, and closed all of its stores by April 12. The office of the Superintendent of Bankruptcy, a federal agency, is responsible for overseeing that bankruptcies are administered in a fair and orderly manner by all licensed Trustees in Canada.

Trustees in bankruptcy, 1041 individuals licensed to administer insolvencies, bankruptcy and proposal estates and are governed by the Bankruptcy and Insolvency Act of Canada.

Bankruptcy is filed when a person or a company becomes insolvent and cannot pay their debts as they become due and if they have at least $1,000 in debt.

In 2011, the Superintendent of bankruptcy reported that trustees in Canada filed 127,774 insolvent estates. Consumer estates were the vast majority, with 122 999 estates. [25] The consumer portion of the 2011 volume is divided into 77,993 bankruptcies and 45,006 consumer proposals. This represented a reduction of 8.9% from 2010. Commercial estates filed by Canadian trustees in 2011 4,775 estates, 3,643 bankruptcies and 1,132 Division 1 proposals. [26] This represents a reduction of 8.6% over 2010.

Duties of trustees

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

Creditors' meetings

Creditors become involved by attending creditors' meetings. The trustee calls the first meeting of creditors for the following purposes:

Consumer proposals

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 accept the deal—because if they do not, the next alternative may be personal bankruptcy, in which the creditors get even less money. The creditors have 45 days to accept or reject the consumer proposal. Once the proposal is accepted by both the creditors and the Court, the debtor makes the payments to the Proposal Administrator each month (or as otherwise stipulated in their proposal), and the general creditors are prevented from taking any further legal or collection action. If the proposal is rejected, the debtor is returned to his prior insolvent state and may have no alternative but to declare personal bankruptcy.

A consumer proposal can only be made by a debtor with debts to a maximum of $250,000 (not including the mortgage on their principal residence). If debts are greater than $250,000, the proposal must be filed under Division 1 of Part III of the Bankruptcy and Insolvency Act. An Administrator is required in the Consumer Proposal, and a Trustee in the Division I Proposal (these are virtually the same although the terms are not interchangeable). A Proposal Administrator is almost always a licensed trustee in bankruptcy, although the Superintendent of Bankruptcy may appoint other people to serve as administrators.

In 2006, there were 98,450 personal insolvency filings in Canada: 79,218 bankruptcies and 19,232 consumer proposals. [27]

China

The People's Republic of China legalized bankruptcy in 1986, and a revised law that was more expansive and complete was enacted in 2007.

Ireland

Bankruptcy in Ireland applies only to natural persons. Other insolvency processes including liquidation and examinership are used to deal with corporate insolvency.

Irish bankruptcy law has been the subject of significant comment, from both government sources and the media, as being in need of reform. Part 7 of the Civil Law (Miscellaneous Provisions) Act 2011 [28] has started this process and the government has committed to further reform.

India

The Parliament of India in the first week of May 2016 passed Insolvency and Bankruptcy Code 2016 (New Code). Earlier a clear law on corporate bankruptcy did not exist, even though individual bankruptcy laws have been in existence since 1874. The earlier law in force was enacted in 1920 called the Provincial Insolvency Act.

The legal definitions of the terms bankruptcy, insolvency, liquidation and dissolution are contested in the Indian legal system. There is no regulation or statute legislated upon bankruptcy which denotes a condition of inability to meet a demand of a creditor as is common in many other jurisdictions.

Winding up of companies was in the jurisdiction of the courts which can take a decade even after the company has actually been declared insolvent. On the other hand, supervisory restructuring at the behest of the Board of Industrial and Financial Reconstruction is generally undertaken using receivership by a public entity.

The Netherlands

Dutch bankruptcy law is governed by the Dutch Bankruptcy Code (Faillissementswet). The code covers three separate legal proceedings.

Russia

Federal Law No. 127-FZ "On Insolvency (Bankruptcy)" dated 26 October 2002 (as amended) (the "Bankruptcy Act"), replacing the previous law in 1998, to better address the above problems and a broader failure of the action. Russian insolvency law is intended for a wide range of borrowers: individuals and companies of all sizes, with the exception of state-owned enterprises, government agencies, political parties and religious organizations. There are also special rules for insurance companies, professional participants of the securities market, agricultural organizations and other special laws for financial institutions and companies in the natural monopolies in the energy industry. Federal Law No. 40-FZ "On Insolvency (Bankruptcy)" dated 25 February 1999 (as amended) (the "Insolvency Law of Credit Institutions") contains special provisions in relation to the opening of insolvency proceedings in relation to the credit company. Insolvency Provisions Act, credit organizations used in conjunction with the provisions of the Bankruptcy Act.

Bankruptcy law provides for the following stages of insolvency proceedings: • Monitoring procedure or Supervision (nablyudeniye); • The economic recovery (finansovoe ozdorovleniye); • External control (vneshneye upravleniye); • Liquidation (konkursnoye proizvodstvo) and • Amicable Agreement (mirovoye soglasheniye).

The main face of the bankruptcy process is the insolvency officer (trustee in bankruptcy, bankruptcy manager). At various stages of bankruptcy, he must be determined: the temporary officer in Monitoring procedure, external manager in External control, the receiver or administrative officer in The economic recovery, the liquidator. During the bankruptcy trustee in bankruptcy (insolvency officer) has a decisive influence on the movement of assets (property) of the debtor - the debtor and has a key influence on the economic and legal aspects of its operations.

South Africa

Switzerland

Under Swiss law, bankruptcy can be a consequence of insolvency. It is a court-ordered form of debt enforcement proceedings that applies, in general, to registered commercial entities only. In a bankruptcy, all assets of the debtor are liquidated under the administration of the creditors, although the law provides for debt restructuring options similar to those under Chapter 11 of the U.S. Bankruptcy code.

Sweden

In Sweden, bankruptcy (Swedish: konkurs) is a formal process that may involve a company or individual. It is not the same as insolvency, which is inability to pay debts that should have been paid. A creditor or the company itself can apply for bankruptcy. An external bankruptcy manager takes over the company or the assets of the person, and tries to sell as much as possible. A person or a company in bankruptcy can not access its assets (with some exceptions).

The formal bankruptcy process is rarely carried out for individuals. [29] Creditors can claim money through the Enforcement Administration anyway, and creditors do not usually benefit from the bankruptcy of individuals because there are costs of a bankruptcy manager which has priority. Unpaid debts remain after bankruptcy for individuals. People who are deeply in debt can obtain a debt arrangement procedure (Swedish: skuldsanering). On application, they obtain a payment plan under which they pay as much as they can for five years, and then all remaining debts are cancelled. Debts that derive from a ban on business operations (issued by court, commonly for tax fraud or fraudulent business practices) or owed to a crime victim as compensation for damages, are exempted from this—and, as before this process was introduced in 2006, remain lifelong. [30] Debts that have not been claimed during a 3-10 year period are cancelled. Often crime victims stop their claims after a few years since criminals often do not have job incomes and might be hard to locate, while banks make sure their claims are not cancelled. The most common reasons for personal insolvency in Sweden are illness, unemployment, divorce or company bankruptcy.

For companies, formal bankruptcy is a normal effect of insolvency, even if there is a reconstruction mechanism where the company can be given time to solve its situation, e.g. by finding an investor. The formal bankruptcy involves contracting a bankruptcy manager, who makes certain that assets are sold and money divided by the priority the law claims, and no other way. Banks have such a priority. After a finished bankruptcy for a company, it is terminated. The activities might continue in a new company which has bought important assets from the bankrupted company.

United Kingdom

Bankruptcy in the United Kingdom (in a strict legal sense) relates only to individuals (including sole proprietors) and partnerships. Companies and other corporations enter into differently named legal insolvency procedures: liquidation and administration (administration order and administrative receivership). However, the term 'bankruptcy' is often used when referring to companies in the media and in general conversation. Bankruptcy in Scotland is referred to as sequestration. To apply for bankruptcy in Scotland, an individual must have more than £1,500 of debt.

A trustee in bankruptcy must be either an Official Receiver (a civil servant) or a licensed insolvency practitioner. Current law in England and Wales derives in large part from the Insolvency Act 1986. Following the introduction of the Enterprise Act 2002, a UK bankruptcy now normally last no longer than 12 months, and may be less if the Official Receiver files in court a certificate that investigations are complete. It was expected that the UK Government's liberalisation of the UK bankruptcy regime would increase the number of bankruptcy cases; initially, cases increased, as the Insolvency Service statistics appear to bear out. Since 2009, the introduction of the Debt Relief Order has resulted in a dramatic fall in bankruptcies, the latest estimates for year 2014/15 being significantly less than 30,000 cases.

UK Bankruptcy statistics
YearBankruptciesIVAsTotal
200435,98910,75246,741
200547,29120,29367,584
200662,95644,332107,288
200764,48042,165106,645
200867,42839,116106,544
Pensions

The UK bankruptcy law was changed in May 2000, effective May 29, 2000. [31] Debtors may now retain occupational pensions while in bankruptcy, except in rare cases. [31]

Proposed reform

The Government have updated legislation (2016) to streamline the application process for UK bankruptcy. UK residents now need to apply online for bankruptcy - there is an upfront fee of £655. The process for residents of Northern Ireland differs - applicants must follow the older process of applying through the courts. [31]

United States

In 2013, Detroit filed the largest municipal bankruptcy case in U.S. history. Detroit, USA Taken From Windsor, Canada.jpg
In 2013, Detroit filed the largest municipal bankruptcy case in U.S. history.

Bankruptcy in the United States is a matter placed under federal jurisdiction by the United States Constitution (in Article 1, Section 8, Clause 4), which empowers Congress to enact "uniform Laws on the subject of Bankruptcies throughout the United States". Congress has enacted statutes governing bankruptcy, primarily in the form of the Bankruptcy Code, located at Title 11 of the United States Code. [32]

A debtor declares bankruptcy to obtain relief from debt, and this is normally accomplished either through a discharge of the debt or through a restructuring of the debt. When a debtor files a voluntary petition, their bankruptcy case commences. [33]

Debts and exemptions

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 dependent upon State law. [34] A Bankruptcy Exemption defines the property a debtor may retain and preserve through bankruptcy. Certain real and personal property can be exempted on "Schedule C" [35] of a debtor's bankruptcy forms, and effectively be taken outside the debtor's bankruptcy estate. Bankruptcy exemptions are available only to individuals filing bankruptcy. [36]

There are two alternative systems that can be used to "exempt" property from a bankruptcy estate, federal exemptions [37] (available in some states but not all), and state exemptions (which vary widely between states). For example, Maryland and Virginia, which are adjoining states, have different personal exemption amounts that cannot be seized for payment of debts. This amount is the first $6,000 in property or cash in Maryland, [38] but normally only the first $5,000 in Virginia. [39] State law therefore plays a major role in many bankruptcy cases, such that there may be significant differences in the outcome of a bankruptcy case depending upon the state in which it is filed.

After a bankruptcy petition is filed, the court schedules a hearing called a 341 meeting or meeting of creditors, at which the bankruptcy trustee and creditors review the petitioner's petition and supporting schedules, question the petitioner, and can challenge exemptions they believe are improper. [40]

Chapters

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; also known as straight bankruptcy; it is the simplest and quickest form of bankruptcy available
  • Chapter 9: municipal bankruptcy; a federal mechanism for the resolution of municipal debts
  • Chapter 11: rehabilitation or reorganization, used primarily by business debtors, but sometimes by individuals with substantial debts and assets; known as corporate bankruptcy, it is a form of corporate financial reorganisation which typically allows companies to continue to function while they follow debt repayment plans
  • Chapter 12: rehabilitation for family farmers and fishermen;
  • Chapter 13: rehabilitation with a payment plan for individuals with a regular source of income; enables individuals with regular income to develop a plan to repay all or part of their debts; also known as Wage Earner Bankruptcy
  • Chapter 15: ancillary and other international cases; provides a mechanism for dealing with bankruptcy debtors and helps foreign debtors to clear debts.

An important feature applicable to all types of bankruptcy filings is the automatic stay. [41] The automatic stay means that the mere request for bankruptcy protection automatically halts most lawsuits, repossessions, foreclosures, evictions, garnishments, attachments, utility shut-offs, and debt collection activity.

The most common types of personal bankruptcy for individuals are Chapter 7 and Chapter 13. Chapter 7, known as a "straight bankruptcy" involves the discharge of certain debts without repayment. Chapter 13, involves a plan of repayment of debts over a period of years. Whether a person qualifies for Chapter 7 or Chapter 13 is in part determined by income. [42] [43] As many as 65% of all U.S. consumer bankruptcy filings are Chapter 7 cases.

Before a consumer may obtain bankruptcy relief under either Chapter 7 or Chapter 13, the debtor is to undertake credit counselling with approved counseling agencies prior to filing a bankruptcy petition and to undertake education in personal financial management from approved agencies prior to being granted a discharge of debts under either Chapter 7 or Chapter 13. Some studies of the operation of the credit counseling requirement suggest that it provides little benefit to debtors who receive the counseling because the only realistic option for many is to seek relief under the Bankruptcy Code. [44]

Corporations and other business forms normally file under Chapters 7 or 11.

Chapter 7

Often called "straight bankruptcy" or "simple bankruptcy," a Chapter 7 bankruptcy potentially allows debtors to eliminate most or all of their debts over a period of as little as three or four months. In a typical consumer bankruptcy, the only debts that survive a Chapter 7 are student loans, child support obligations, some tax bills and criminal fines. Credit cards, pay day loans, personal loans, medical bills, and just about all other bills are discharged.

In Chapter 7, a debtor surrenders non-exempt property to a bankruptcy trustee, who then liquidates the property and distributes the proceeds to the debtor's unsecured creditors. In exchange, the debtor is entitled to a discharge of some debt. However, the debtor is not granted a discharge if guilty of certain types of inappropriate behavior (e.g., concealing records relating to financial condition) and certain debts (e.g., spousal and child support and most student loans). Some taxes are not discharged even though the debtor is generally discharged from debt. Many individuals in financial distress own only exempt property (e.g., clothes, household goods, an older car, or the tools of their trade or profession) and do not have to surrender any property to the trustee. [42] The amount of property that a debtor may exempt varies from state to state (as noted above, Virginia and Maryland have a $1,000 difference.) Chapter 7 relief is available only once in any eight-year period. Generally, the rights of secured creditors to their collateral continues, even though their debt is discharged. For example, absent some arrangement by a debtor to surrender a car or "reaffirm" a debt, the creditor with a security interest in the debtor's car may repossess the car even if the debt to the creditor is discharged.

Ninety-one percent of U.S. individuals who petition for relief under Chapter 7 hire an attorney to file their petitions. [45] The typical cost of an attorney is $1,170.00. [45] Alternatives to filing with an attorney are: filing pro se, [46] hiring a non-lawyer petition preparer, [47] or using online software to generate the petition.

To be eligible to file a consumer bankruptcy under Chapter 7, a debtor must qualify under a statutory "means test". [48] The means test was intended to make it more difficult for a significant number of financially distressed individual debtors whose debts are primarily consumer debts to qualify for relief under Chapter 7 of the Bankruptcy Code. The "means test" is employed in cases where an individual with primarily consumer debts has more than the average annual income for a household of equivalent size, computed over a 180-day period prior to filing. If the individual must "take" the "means test", their average monthly income over this 180-day period is reduced by a series of allowances for living expenses and secured debt payments in a very complex calculation that may or may not accurately reflect that individual's actual monthly budget. If the results of the means test show no disposable income (or in some cases a very small amount) then the individual qualifies for Chapter 7 relief. An individual who fails the means test will have their Chapter 7 case dismissed, or may have to convert the case to a Chapter 13 bankruptcy.

If a debtor does not qualify for relief under Chapter 7 of the Bankruptcy Code, either because of the Means Test or because Chapter 7 does not provide a permanent solution to delinquent payments for secured debts, such as mortgages or vehicle loans, the debtor may still seek relief under Chapter 13 of the Code. A Chapter 13 plan often does not require repayment to general unsecured debts, such as credit cards or medical bills.

Generally, a trustee sells most of the debtor's assets to pay off creditors. However, certain debtor assets will be protected to some extent by bankruptcy exemptions. These include Social Security payments, unemployment compensation, limited equity in a home, car, or truck, household goods and appliances, trade tools, and books. However, these exemptions vary from state to state.

Chapter 11

In Chapter 11 bankruptcy, the debtor retains ownership and control of assets and is re-termed a debtor in possession (DIP). [49] The debtor in possession runs the day-to-day operations of the business while creditors and the debtor work with the Bankruptcy Court in order to negotiate and complete a plan. Upon meeting certain requirements (e.g., fairness among creditors, priority of certain creditors) creditors are permitted to vote on the proposed plan. [50] If a plan is confirmed, the debtor continues to operate and pay debts under the terms of the confirmed plan. If a specified majority of creditors do not vote to confirm a plan, additional requirements may be imposed by the court in order to confirm the plan. Debtors filing for Chapter 11 protection a second time are known informally as "Chapter 22" filers. [51]

Chapter 13

In Chapter 13, debtors retain ownership and possession of all their assets, but must devote some portion of future income to repaying creditors, generally over three to five years. [52] The amount of payment and period of the repayment plan depend upon a variety of factors, including the value of the debtor's property and the amount of a debtor's income and expenses. [53] Under this chapter, the debtor can propose a repayment plan in which to pay creditors over three to five years. If the monthly income is less than the state's median income, the plan is for three years, unless the court finds "just cause" to extend the plan for a longer period. If the debtor's monthly income is greater than the median income for individuals in the debtor's state, the plan must generally be for five years. A plan cannot exceed the five-year limit. [53]

Relief under Chapter 13 is available only to individuals with regular income whose debts do not exceed prescribed limits. [54] If the debtor is an individual or a sole proprietor, the debtor is allowed to file for a Chapter 13 bankruptcy to repay all or part of the debts. Secured creditors may be entitled to greater payment than unsecured creditors. [52]

In contrast to Chapter 7, the debtor in Chapter 13 may keep all property, whether or not exempt. If the plan appears feasible and if the debtor complies with all the other requirements, the bankruptcy court typically confirms the plan and the debtor and creditors are bound by its terms. Creditors have no say in the formulation of the plan, other than to object to it, if appropriate, on the grounds that it does not comply with one of the Code's statutory requirements. [55] Generally, the debtor makes payments to a trustee who disburses the funds in accordance with the terms of the confirmed plan.

When the debtor completes payments pursuant to the terms of the plan, the court formally grant the debtor a discharge of the debts provided for in the plan. [53] However, if the debtor fails to make the agreed upon payments or fails to seek or gain court approval of a modified plan, a bankruptcy court will normally dismiss the case on the motion of the trustee. [56] After a dismissal, creditors may resume pursuit of state law remedies to recover the unpaid debt.

Europe

In 2004, the number of insolvencies reached record highs in many European countries. In France, company insolvencies rose by more than 4%, in Austria by more than 10%, and in Greece by more than 20%. The increase in the number of insolvencies, however, does not indicate the total financial impact of insolvencies in each country because there is no indication of the size of each case. An increase in the number of bankruptcy cases does not necessarily entail an increase in bad debt write-off rates for the economy as a whole.

Bankruptcy statistics are also a trailing indicator. There is a time delay between financial difficulties and bankruptcy. In most cases, several months or even years pass between the financial problems and the start of bankruptcy proceedings. Legal, tax, and cultural issues may further distort bankruptcy figures, especially when comparing on an international basis. Two examples:

The insolvency numbers for private individuals also do not show the whole picture. Only a fraction of heavily indebted households file for insolvency. Two of the main reasons for this are the stigma of declaring themselves insolvent and the potential business disadvantage.

Following the soar in insolvencies in the last decade, a number of European countries, such as France, Germany, Spain and Italy, began to revamp their bankruptcy laws in 2013. They modelled these new laws after the image of Chapter 11 of the U.S. Bankruptcy Code. Currently, the majority of insolvency cases have ended in liquidation in Europe rather than the businesses surviving the crisis. These new law models are meant to change this; lawmakers are hoping to turn bankruptcy into a chance for restructuring rather than a death sentence for the companies. [57]

Effective sovereign bankruptcy

Technically, states do not collapse directly due to a sovereign default event itself. However, the tumultuous events that follow may bring down the state, so in common language we do describe states as being bankrupted.

Some examples of this are when a Korean state bankrupted Imperial China causing its destruction, or more specifically, when Chang'an's (Sui Dynasty) war with Pyongyang (Goguryeo) in 614 A.D. ended in the former's disintegration within 4 years, although the latter also seemingly entered into decline and fell some 56 years later. [58] Another example is when the United States, with heavy financial backing from its allies (creditors), bankrupted the Soviet Union which led to the latter's demise. [59]

See also

Related Research Articles

Chapter 11 is a chapter of Title 11, the United States Bankruptcy Code, which permits reorganization under the bankruptcy laws of the United States. Chapter 11 bankruptcy is available to every business, whether organized as a corporation, partnership or sole proprietorship, and to individuals, although it is most prominently used by corporate entities. In contrast, Chapter 7 governs the process of a liquidation bankruptcy, though liquidation can be done under Chapter 11 also; while Chapter 13 provides a reorganization process for the majority of private individuals.

Chapter 7 of the Title 11 of the United States Code governs the process of liquidation under the bankruptcy laws of the United States. Chapter 7 is the most common form of bankruptcy in the United States.

Title 11 of the United States Code sets forth the statutes governing the various types of relief for bankruptcy in the United States. Chapter 13 of the United States Bankruptcy Code provides an individual the opportunity to propose a plan of reorganization to reorganize their financial affairs while under the bankruptcy court's protection. The purpose of chapter 13 is to enable an individual with a regular source of income to propose a chapter 13 plan that provides for their various classes of creditors. Under chapter 13, the Bankruptcy Court has the power to approve a chapter 13 plan without the approval of creditors as long as it meets the statutory requirements under chapter 13. Chapter 13 plans are usually three to five years in length and may not exceed five years. Chapter 13 is in contrast to the purpose of Chapter 7, which does not provide for a plan of reorganization, but provides for the discharge of certain debt and the liquidation of non-exempt property. A Chapter 13 plan may be looked at as a form of debt consolidation, but a Chapter 13 allows a person to achieve much more than simply consolidating his or her unsecured debt such as credit cards and personal loans. A chapter 13 plan may provide for the three general categories of debt: priority claims, secured claims, priority unsecured claims, and general unsecured claims. Chapter 13 plans are often used to cure arrearages on a mortgage, avoid "underwater" junior mortgages or other liens, pay back taxes over time, or partially repay general unsecured debt. In recent years, some bankruptcy courts have allowed Chapter 13 to be used as a platform to expedite a mortgage modification application.

Personal bankruptcy law allows, in certain jurisdictions, an individual to be declared bankrupt. Virtually every country with a modern legal system features some form of debt relief for individuals. Personal bankruptcy is distinguished from corporate bankruptcy.

In the United States, bankruptcy is governed by federal law, commonly referred to as the "Bankruptcy Code" ("Code"). The United States Constitution authorizes Congress to enact "uniform Laws on the subject of Bankruptcies throughout the United States." Congress has exercised this authority several times since 1801, including through adoption of the Bankruptcy Reform Act of 1978, as amended, codified in Title 11 of the United States Code and the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA).

Bankruptcy Abuse Prevention and Consumer Protection Act

The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA), is a legislative act that made several significant changes to the United States Bankruptcy Code. Referred to colloquially as the "New Bankruptcy Law", the Act of Congress attempts to, among other things, make it more difficult for some consumers to file bankruptcy under Chapter 7; some of these consumers may instead utilize Chapter 13. Voting record of S. 256.

A trustee in bankruptcy is an entity, often an individual, in charge of administering a bankruptcy estate.

Consumer bankruptcy in Canada is governed by the Bankruptcy and Insolvency Act ("BIA"). The legislation is complemented by regulations, as well as directives from the Office of the Superintendent of Bankruptcy that provide guidelines to trustees in bankruptcy on various aspects of the BIA.

Bankruptcy in the United Kingdom is divided into separate local regimes for England and Wales, for Northern Ireland, and for Scotland. There is also a UK insolvency law which applies across the United Kingdom, since bankruptcy refers only to insolvency of individuals and partnerships. Other procedures, for example administration and liquidation, apply to insolvent companies. However, the term 'bankruptcy' is often used when referring to insolvent companies in the general media.

<i>Bankruptcy and Insolvency Act</i> the statute that regulates the law on bankruptcy and insolvency in Canada

The Bankruptcy and Insolvency Act ("BIA") is one of the statutes that regulates the law on bankruptcy and insolvency in Canada. It governs bankruptcies, consumer and commercial proposals, and receiverships in Canada.

In England and Wales, an individual voluntary arrangement (IVA) is a formal alternative for individuals wishing to avoid bankruptcy.

Enterprise Act 2002

The Enterprise Act 2002 is an Act of the Parliament of the United Kingdom which made major changes to UK competition law with respect to mergers and also changed the law governing insolvency bankruptcy. It made cartels illegal with a maximum prison sentence of 5 years and states that level of competition in a market should be the basis for investigation.

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.

An unfair preference is a legal term arising in bankruptcy law where a person or company transfers assets or pays a debt to a creditor shortly before going into bankruptcy, that payment or transfer can be set aside on the application of the liquidator or trustee in bankruptcy as an unfair preference or simply a preference.

A general assignment or assignment is a concept in bankruptcy law that has a similar meaning, due to common law ancestry, in different jurisdictions, but wide dispersion in practical application. The "assignment for the benefit of creditors", also known as an ABC or AFBC is an alternative to bankruptcy, which is a "general assignment"/"assignment" concept.

As a legal concept, administration is a procedure under the insolvency laws of a number of common law jurisdictions, similar to bankruptcy in the United States. It functions as a rescue mechanism for insolvent entities and allows them to carry on running their business. The process – in the United Kingdom colloquially called "under administration" – is an alternative to liquidation, or may be a precursor to it. Administration is commenced by an administration order. A company in administrative receivership is operated by an administrator on behalf of its creditors. The administrator may recapitalize the business, sell the business to new owners, or demerge it into elements that can be sold and close the remainder. Most countries distinguish between voluntary (board-decided) and involuntary (court-decided) receivership. In voluntary administrative receivership, the administrator is appointed by the company directors. In involuntary administrative receivership, the administrator is appointed by a judicial court. The legal terms for these processes vary from country to country, and the processes may overlap.

Bankruptcy in Irish Law is a legal process, supervised by the High Court whereby the assets of a personal debtor are realised and distributed amongst his or her creditors in cases where the debtor is unable or unwilling to pay his debts.

British Virgin Islands bankruptcy law

British Virgin Islands bankruptcy law is principally codified in the Insolvency Act, 2003, and to a lesser degree in the Insolvency Rules, 2005. Most of the emphasis of bankruptcy law in the British Virgin Islands relates to corporate insolvency rather than personal bankruptcy. As an offshore financial centre, the British Virgin Islands has many times more resident companies than citizens, and accordingly the courts spend more time dealing with corporate insolvency and reorganisation.

Anguillan bankruptcy law

Anguillan bankruptcy law regulates the position of individuals and companies who are unable to meet their financial obligations.

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Further reading