Business Resources: Understanding Bankruptcy Law
In today's economy when many people are struggling financially, bankruptcy has become an ever more popular method to get out of debt. Even businessmen, by the thousands, file for personal bankruptcy when their enterprises go bad. Today, the significance of Bankruptcy Law is more important than ever because it is one of best ways for people to settle their debts and avoid costly legal actions.
Bankruptcy Law is a federal law where a debtor turns over his assets to a trustee which are then used to settle his outstanding obligations. However, if the lender has several creditors, he can avail of a plan for his assets to be divided among his creditors to resolve his debts. Bankruptcy Law regulates this division by considering the interests of all creditors for each one is treated with the same measure. Some bankruptcy proceedings even allow a debtor to continue his business while using the proceeds to settle his debts.
The History of Bankruptcy
In ancient times, there was no such practice as bankruptcy. When a man borrowed and could not pay; his entire household was compelled into debt slavery until the creditor recovered his losses.
In 1543, English Monarch Henry VIII, promulgated the first official law about bankruptcy. During his era, a bankrupt borrower was considered a criminal and was given as extreme a punishment as incarceration or even death. England was the birthplace of Bankruptcy Law as it is now practiced in the United States. King Henry VIII intended the law to benefit only the creditors not the debtors. Centuries later, the English system codified the English Act of 1825 which allowed collusive bankruptcy. Collusive bankruptcy was an agreement reached by a creditor and a debtor that was applied when a borrower filed an insolvency declaration in the Chancellor’s Secretary of Bankruptcy. The application was posted for public viewing while awaiting a resolution by a bankruptcy commission. Between 1557 and 1596, King Phillip II of Spain declared four separate state bankruptcies which marked him as the first monarch to declare bankruptcy.
In the United States, there were federal bankruptcy laws which were temporary reactions to the country’s poor economy, In 1800, the first official bankruptcy law was enacted to answer land speculation but it was repealed on its third year. In 1841, a second bankruptcy law was passed as a response to the panic of 1837 but it was repealed in 1843. The economic disturbance of the Civil War required Congress to pass Bankruptcy Law of 1867 but it was also repealed after a decade. The Laws of 1800 and 1841 were mostly measures dealing with unpaid debt and it was not until the Law of 1867 that protection of corporations was provided.
For the first time, the U.S. Bankruptcy Act of 1898 gave companies in distress options to protect themselves from creditors. During the period of America’s Great Depression, more bankruptcy legislations were enacted; such as the Bankruptcy Acts of 1933 and 1934. These legislations emphasized that debtors in trouble must be given a chance to make a fresh start. The Chandler Act of 1938 included substantial provisions in reorganizing business; Sec 60 created separate fund scheme which decreased the losses of debtors by giving them the advantage over the claims of their creditors.
The economic turmoil of the 1969 and 1970 resulted in voluntary liquidations, mergers, receiverships and bankruptcies of a great number of brokerage houses. In response to these mishaps, Congress passed the Securities Investor Protection Act of 1970 in order to reduce filings of bankruptcy, to recover investor confidence and to promote the financial responsibility requirements for registered brokers and dealers.
From World War II through the 1970s, bankruptcy was not a major issue. The Bankruptcy Reform Act of 1978, effective on October 1, 1979, continued to serve as the governing uniform federal law covering all bankruptcy cases. There were lots of significant developments regarding bankruptcy during the 1980’s. During the 1980s and early 1990s, all types of bankruptcies were filed by well-known companies forcing the court system to search for measures to face this huge challenge. So the court introduced the prepackaged and pre-arranged bankruptcies which were new techniques to reduce its surmounting caseloads. Also known as prepack, this technique was used when a company and creditor met and agreed upon the terms of a recovery plan before filing the petition. This measure offered more time and cost-effective bankruptcy reorganization.
On October 22, 1994, the Bankruptcy Reform Act of 1994, considered the most detailed bankruptcy legislation since the 1978 Act, was approved as a law by President Bill Clinton. It included many provisions for both business and consumer bankruptcy; it also organized the National Bankruptcy Commission to examine further changes and make reforms in bankruptcy law and other related matters.
April 19, 2005 was the date President George W. Bush signed the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA). This law required borrowers to pay back at least a part of their debts and those who wanted to erase all their debts had to wait 8 years before they could file again. This bill became a law after eight years of withstanding debates in Congress which resulted in several amendments. Among the amendments were the difficulty of person or estate to file bankruptcy; this required filers to take credit counseling and attend personal financial management education and placed more emphasis on the accountability and transparency of the bankruptcy process.
Amendments to Federal Rules of Bankruptcy became effective in April 2007 but were only applied to pending cases as of December 1 and all cases thereafter. Among the changes were: new formatting standards and the restriction of omnibus objections; a clearer disclosure relating to cash collateral and debtor-in possession financing usage; certain limitations on first day orders; rejection of executory contracts and unexpired leases to provide greater restrictions on omnibus motions; and allowing Court to order a change in venue.
Debt Restructuring Practices
Banks and other lending institutions provide debt restructuring to assist companies which are unable to meet their obligations due to financial difficulty. They advise these companies to apply for loan modification to avoid default. Although banks are not legally required to do so, they are willing to comply with this practice to prevent more losses as most banks prefer to reconstruct a loan rather then a foreclosure.
For private individuals, lending institutions must investigate the underlying problem of the creditor and recommend a supervised rehabilitation program. A rehabilitation program includes debt advice, financial education and help to find sources of income and management of household expenditures.
There are different possibilities for debt restructuring: the creditor may modify the loan agreement; they may simply reduce the interest or lower the rates of interest or extend the period so monthly dues are reduced. Another method is for a lender to transfer money from a third party, real estate or assets to settle the debt. On the extreme is the case when a creditor will decide to grant forgiveness for the entire debt including its accrued interest.
Some people take bankruptcy law for granted by filing an application even if their assets are legally solvent. Since bankruptcy fraud has all the elements common to a crime, it is considered a white-collar crime. It involves concealment of assets, conflicts of interest, concealment or destruction of documents, false statements or declarations, fraudulent claims, and fee fixing or redistribution arrangements. Another device used in this fraud is applying in two separate states since cases are handled separately from federal state to state. Some corrupt individuals have used faked names, faked Social Security numbers or other faked identities.
Bankruptcy fraud is a serious crime which the government takes great effort to control so only those who are truly in the state of bankruptcy are able to benefit. Being convicted of bankruptcy fraud has a penalty of five years or more in a federal prison and a fine of $250,000. Ex-convicts of fraud are branded as convicted felons.
Bankruptcy Laws Around the World
In the United States, Federal Courts handle the lawful process when debtors want to eliminate or pay their debts. United States Code gives federal systems the prerogative in allowing debtors to place their financial affairs under the control of the bankruptcy courts. Each state maintains its own bankruptcy court which is a branch of the District Courts of the U.S, and each territory governs several counties.
In England and Wales, bankruptcy is included in the Insolvency Rule. It declares that only individuals can be declared bankrupt not companies. An individual is declared bankrupt only by court order after presenting a bankruptcy petition giving the reason why he is not in a position to pay his own debt. A creditor may also present a petition for a bankruptcy order against the individual debtor.
There is a new law in Canada affecting bankruptcy. New changes include: increase in the consumer proposal for debt limits, exemption of the Registered Retirement Savings from seizure, non-termination of secured loans and leases due to bankruptcy, a longer period required when bankruptcy involved surplus income, longer bankruptcy due to large tax debts and student loans are erased after 7 years.
Justice requires the equal application of laws so with many options offered to debtors, creditors, too, have their rights and alternatives to their claim against a debtor. They have legal privileges to:
1. Have a portion in the division of bankruptcy estate based on the preference of their claim. It is noted that non-wage and unsecured claims occupy the lowest level in the scheme and that this portion may be small or nothing.
2. Be heard by the court regarding the filer's opinion of the debtor’s method; the settlement of debtor’s assets which are not exempt and the payments from the estate’s assets.
3. Confront the debtor’s right and to counteract the borrower’s demand to have the case dismissed.
What about Bankruptcy Alternatives?
When bankruptcy issues are not taken seriously, the repercussion will surely affect the debtor's ability to secure a loan in the future. To avoid any negative effect, the following options are available:
1. Take no action – In case you have nothing to settle your debts with, the best reaction is to take no action at all. If the creditor is convinced that he cannot squeeze anything out of you, perhaps he will not file any action. But it will be very hard on your part to apply for credit in the future.
2. Self-Money Management – You can learn to manage your income by properly budgeting your cash and using your extra savings to pay your debt. Evaluate and analyze your expenses to find areas where you can save.
3. Negotiate with Creditors – If you have an asset or enough income to liquidate your credit, use this to settle your debt. Proper negotiation will give you enough time to reset your finances.
4. Debt Restructuring – This is the process of allowing an individual, company or even a sovereign entity facing financial problems to lessen his accountability and discuss the status of the unpaid obligation. The purpose is to remedy and recover your financial liquidity so you can continue your operation. Out-of-court settlement of debts is a global alternative; however, different countries have different laws for debt restructuring.
5. Debt Consolidation – If you are in a quandary on how to handle your multiple credits, you can resort to debt consolidation. Debt consolidation is securing one loan to pay off many others. The purpose is to secure lower interest rates or the convenience of paying only one loan. It is the process of combining a number of unsecured consolidations into one secured loan using collateral which is commonly a house.
6. Formal Proposal for Creditors – Formal proposal is made through a Trustee/Administrator where you present some type of proposal to settle your debt. It can include a request for debt reduction or extension of payment. Payments may be the whole amount or made by monthly installments.
7. Individual Voluntary Assistance (IVA) is only available in the United Kingdom. This is a part of the Insolvency Act of 1986 which allows a debtor to make a formal arrangement with the creditor to pay his obligation for a period of 5 years. In case the amount of the debt goes beyond 5 years, it has to be written off by the creditor.
Bankruptcy Law Resources
- Links to Useful Resources –These are important bankruptcy resources which are only applicable to the United States. Other information related to the topic is found in this link.
- Bankruptcy Law Research – There are articles containing statutes, cases and laws to make readers understand what this law is all about.
- Bankruptcy Lawyers in UK – Find the best place to contact your bankruptcy lawyer to give you the best advice.
- Guide to Bankruptcy Law– There are so many things you need to know about the bankruptcy law so you will be able to safeguard your assets.
- Alternatives to Bankruptcy – Do you know that there are alternatives to your declaring bankruptcy? Visit this site and find out.
- Credit Counseling – Part of the counseling is to look at your finances and determine if there is some other alternative than filing bankruptcy.
- Bankruptcy: An Overview– Learn to handle your bankruptcy issue by getting an overview of the whole process involved.
- Bankruptcy Law Research Guide – These are the results of research done about Bankruptcy Law in the United States.
- Debt Sovereign Restructuring – There is an ongoing debate on the policies to be used in restructuring debts of countries all over the world.
- Bankruptcy Fraud – Is a white collar crime. More than 1,400 cases of fraud were filed for the year 2009.
- Bankruptcy Laws – People who can no longer pay their debts are given a fresh start by liquidating their assets to pay their debts.