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bankruptcy definition
a federal system of statutes and courts which permits persons and businesses which
are insolvent (debtors) or (in some cases) face potential insolvency, to place his/her/its
financial affairs under the control of the bankruptcy court. The procedure is that
when the debtor's debts exceed his/her/its assets or ability to pay, the debtor
can file a petition with the bankruptcy court for voluntary bankruptcy or the debtor's
unpaid creditors can file an "involuntary" petition to force the debtor into bankruptcy,
although voluntary bankruptcy is far more common. The most common petition is under
Chapter 7, in which a trustee is appointed by the court, the current assets are
counted up by the trustee (with many of them exempt from bankruptcy), who pays debts
to the extent possible with priority for taxes, then secured debts (mortgages or
some judgments), and finally unsecured debts. Then the court adjudicates (officially
declares) the debtor a bankrupt and discharges the unpayable debts, to the loss
of the creditors. Exempt from sale to pay debts are a portion of the value of a
home (equal to a homestead), secured notes that can be kept current, an automobile,
tools of the trade, furniture, and some other items. The concept is to give someone
a fresh start, but it has often led to careless, profligate business operations
and casual running up bills with those giving credit being badly hurt by bankruptcies.
Not dischargeable in bankruptcy are alimony and child support, taxes, and fraudulent
transactions. Filing a bankruptcy petition automatically suspends all existing legal
actions (even on the eve of trial or judgment, or on the day of foreclosure on real
property), and is often used to forestall foreclosure or imposition of judgment.
After 45 or more days a creditor with a debt secured by real or personal property
can petition the court to have the "automatic stay" of legal rights removed and
a foreclosure to proceed. Upon adjudication (officially declared) as a bankrupt
a party cannot file for bankruptcy again for seven years. Chapter 11 bankruptcy
allows a business to reorganize and refinance to be able to prevent final insolvency.
Often there is no trustee, but a "debtor in possession," and considerable time to
present a plan of reorganization. Sometimes this works, but often it is just a bottomless
pit of more debt and delay. The final plan often requires creditors to take only
a small percentage of the debts due (what is owed them) or to take payment over
a long period of time. Chapter 13 is similar to Chapter 11, but is for individuals
to work out payment schedules, which is more likely to be worthwhile. Bankruptcy
law has become a specialty due to complex regulation as well as administration.
Initial fees must be paid up front by the petitioner or the creditors, but much
of the assets may be eaten up by the court-approved fees of the trustees and attorneys
(although often the attorneys find no assets available for payment). There are some
limited state bankruptcy laws to aid debtors, but they are seldom employed, except
to create creditors' committees, which can be developed voluntarily.
See also bankruptcy court bankruptcy proceedings trustee in bankruptcy
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