Purpose of Bankruptcy

A legal proceeding regarding a person or business which is struggle to pay back outstanding debts. The bankruptcy process starts with a petition filed by the borrower (most common) or on behalf of lenders (less common). All of the debtor's property are measured and evaluated, whereupon the assets are used to repay a portion of outstanding debt. Upon the successful completion of bankruptcy proceedings, the debtor is relieved from the debt obligations incurred before filing for bankruptcy.

Bankruptcy laws assist people to who can no longer pay their creditors get a fresh start - by liquidating assets to pay their debts or by making a repayment plan. Bankruptcy laws also protect troubled companies and provide for orderly distributions to business creditors by way of reorganization or liquidation. In theory, the capability to file for bankruptcy may benefit an overall economy by giving individuals and businesses one more opportunity and providing creditors with a measure of debt repayment.

Bankruptcy filings in the United States can fall under one of several chapters of the Bankruptcy Code, such as Chapter 7 (which involves liquidation of property), Chapter 11 (company or individual "reorganizations") and Chapter 13 (debt repayment with lowered debt covenants or payment plans). Bankruptcy filing specifications vary widely between different countries, leading to higher and lower filing rates depending on how easily an individual or company can finish the process.

Bankruptcy in the United States is a issue placed under Federal jurisdiction by the United States Constitution (in Article 1, Section 8, Clause 4), that allows Congress to enact "uniform laws on the subject of bankruptcies throughout the United States". The Congress has enacted statutes governing bankruptcy, mainly in the form of the Bankruptcy Code, located at Title 11 of the United States Code. Federal law is amplified by state law in some places where Federal law fails to speak or expressly defers to state laws.

While bankruptcy cases are usually 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. State law therefore plays a major part in many bankruptcy cases, and it is often impossible to generalise bankruptcy law across state lines.

Usually, a debtor declares bankruptcy to obtain relief from debt, and this is accomplished either through a discharge of the debt or through a restructuring of the debt. Generally, when a debtor files a voluntary petition, his or her bankruptcy case commences.

The goal of bankruptcy is two-fold:

(1) to give the debtor (the party filing bankruptcy) a fresh start and

(2) to pay creditors in an orderly manner. Bankruptcy is governed by federal law which usually trumps state law when it comes to the actions of both the debtor and creditors.