Bankruptcy is a process that has been established by a set of federal laws. Today one of the main aims of bankruptcy is to give the debtor a fresh start by canceling many of his/her debts through an order of court. It is also one of the most complex areas of law. It incorporates elements of corporate law, tax law, real estate law and contract law. What makes bankruptcy even more complicated is the fact that its process may vary from state to state.
Basic Terminology
In order to understand the complex process of bankruptcy we can start by understanding its terminology and history. There are two main parties involved in a bankruptcy petition. On one side, we have the debtor and on the other side, we have the creditor. The debtor refers to the party that owes the debt. The creditor, on the other hand, is the party to whom the debt is owed. A debtor can be a person or company. The creditor in bankruptcy cases is an organization or a company.
In most bankruptcy cases, debtors have two different types of debt - secured and unsecured. If you have a secured debt, it means that the creditor has a legal right to an asset of yours in case you fail to make the required payments. A good example of a secured debt is mortgage. When a bank gives you a loan to pay for your house, the bank also secures a lien on it. So if you miss a mortgage payment, the bank can foreclose your house and take possession of it.
In a business bankruptcy case, secured debt can be very complicated. In many cases, business loans give creditors lien over intangible aspects of the business like, patents, trademarks or intellectual property. In a bankruptcy settlement, the secured debtors are always paid first.
History
Today bankruptcy is a voluntary state. In other words, people or businesses are not forced into bankruptcy. However, this was not always the case. A look at the history of bankruptcy shows that initially people were forced into bankruptcy and were also considered criminals. Very often they were also thrown into debtors’ prison and some were even executed.
The word ‘bankruptcy’ has a very interesting origin. In Italy, there was a tradition of destroying the workbench of a tradesman who failed to pay his debts. The Italians used the phrase ‘banca rotta’ to describe this tradition - the word ‘bankruptcy’ is derived from this phrase.
In the 1800s there were limited bankruptcy laws in the United States. They were passed to help the country through tough economic times. The Bankruptcy Act of 1898 can be identified as the first modern bankruptcy law in the United States. The Depression brought about many changes in this Act. These changes were brought about in the Bankruptcy Act of 1933, the Bankruptcy Act of 1934 and the Chandler Act of 1938. These changes gave individual debtors the power to have their debts discharged. Businesses and corporations were given the opportunity to modify their debts so that they could pay some of it.
The next landmark in the bankruptcy law came in 1978 when the Bankruptcy Reform Act was passed. It was this Act that created the various chapters in bankruptcy. It also expanded the powers and rights of individual debtors and businesses filing for bankruptcy.
This led to a dramatic increase in bankruptcy cases. There were backlog in bankruptcy courts. A need was felt to fast track small bankruptcy cases. Reform laws were passed to encourage people to opt for Chapter 13 instead of Chapter 7.
The latest changes in bankruptcy laws were introduced with the Bankruptcy Act of 2005. This Act has empowered the creditors to a certain extent. Furthermore, it has made Chapter 7 bankruptcies harder to file.
With the recent economic situation one can see more reforms in the bankruptcy laws. Overall, bankruptcy laws are there to help the debtors as well as the creditors. However, one should exercise this option only after careful consideration of the pros and cons of filing bankruptcy. Remember that filing for bankruptcy is not always the best option.