Purpose of Bankruptcy

A legal proceeding involving a person or small business that is struggle to pay back outstanding debts. The bankruptcy process begins with a petition filed by the borrower (most common) or on behalf of creditors (less common). All of the debtor's property are measured and evaluated, whereupon the assets are used to pay back some of outstanding debt. Upon the successful completion of bankruptcy proceedings, the debtor is relieved from the debt obligations incurred prior to submitting for bankruptcy.

Bankruptcy laws help people who can no more pay their creditors get a fresh start - by liquidating assets to pay their debts or by building a repayment plan. Bankruptcy laws also protect troubled businesses 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 persons and businesses another chance 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 property), Chapter 11 (company or personal "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 based on how easily a person or business can complete the procedure.

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, primarily 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 law.

While bankruptcy cases are usually filed in United States Bankruptcy Court (an adjunct to the U.S. District Courts), bankruptcy cases, especially based on the validity of claims and exemptions, are often dependent upon State law. State law therefore plays a significant role in several bankruptcy cases, and it is often not possible to generalise bankruptcy law across state lines.

Generally, 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 purpose 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 fashion. Bankruptcy is governed by federal law which usually trumps state law when it comes to the actions of both the debtor and creditors.