Purpose of Bankruptcy

A legal proceeding regarding an individual or business which is unable to pay back outstanding debts. The bankruptcy process begins with a petition filed by the debtor (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 some of outstanding debt. After the successful completion of bankruptcy proceedings, the debtor is relieved from the debt obligations incurred before submitting for bankruptcy.

Bankruptcy laws help people who can no longer pay their creditors get a fresh start - by liquidating assets to pay their debts or by building a repayment plan. Bankruptcy laws also protect struggling firms and provide for orderly distributions to business creditors by way of reorganization or liquidation. In theory, the capability to file for bankruptcy can benefit an overall economy by giving individuals and businesses another opportunity and offering creditors with a measure of debt repayment.

Bankruptcy filings in the United States can fall under one of many chapters of the Bankruptcy Code, such as Chapter 7 (that involves liquidation of assets), Chapter 11 (company or individual "reorganizations") and Chapter 13 (debt repayment with reduced debt covenants or payment plans). Bankruptcy filing specifications vary widely among different nations, resulting in higher and lower filing rates depending on how easily a person or business can finish the process.

Bankruptcy in the United States is a matter 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, primarily in the form of the Bankruptcy Code, found 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 role in many bankruptcy cases, and it is often not possible 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 even through a restructuring of the debt. Usually, whenever a debtor files a voluntary petition, his or her bankruptcy case commences.

The goal of bankruptcy is two fold:

(1) to offer 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 often trumps state law when it comes to the actions of both the debtor and creditors.