What is Bankruptcy

What is Bankruptcy

Bankruptcy is defined as the legal inability of an individual or company to pay their creditors. Creditors also have the legal right to file bankruptcy petitions, referred to as “involuntary bankruptcies”, against their debtors in the hopes of recouping a portion of what is owed them. However, it is most commonly initiated by the individual or company that can no longer pay their debts.

History of Bankruptcy

From a historical standpoint, bankruptcy laws as we know them in the US today, as well as the concept of bankruptcy, originated in England in 1542 when Laws 34 and 35 were enacted by King Henry VII at that point in time. Ironically, it was planned as a means of relief for a creditor and not a debtor. Originally, the creditor could legally seize all assets and property of a trader if he couldn’t pay his debts.

Although there were no definitive laws of the period, documents about Ancient Greece have revealed a form of bankruptcy wherein a male debtor (only males could be citizens at the time) would have to release his entire household and property if he could not pay his debts. This included his wife, children, and servants, and along with them, they would all be placed into “debt slavery” until all obligations were resolved.

The Types of Bankruptcy

According to Title 11 of the United States Code, the Bankruptcy Code lists 6 distinct types of Bankruptcy as follows:

» Chapter 7 – the quickest and simplest form of bankruptcy
» Chapter 9 – a government mechanism for municipal bankruptcies
» Chapter 11 – a rehabilitation used primarily by businesses and corporations
» Chapter 12 – used by families who farm or fish for a living
» Chapter 13 – a rehabilitation method involving a re-payment plan
» Chapter 15 – helps foreign debtors to resolve their debts

Chapters 7 and 13 are the most common bankruptcies filed by the consumer with approximately 65% of those filings being a Chapter 7. Businesses and corporations usually file either Chapter 7 or 11.

Exclusions and Exemptions

It is important to know that filing bankruptcy does not relieve an individual of their total obligations. Certain debts cannot be discharged inclusive of:

» Child support
» Spousal support
» Student loans
» Taxes (some may be discharged)

Additionally, certain items of property are oftentimes labeled as exempt, such as clothing, household items, or older vehicles, and cannot be seized as partial repayment.


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