Home Equity Loan
Bankruptcy
Bankruptcy is a legally declared inability or impairment of ability of an individual or organization to pay their creditors. A declared state of bankruptcy can be requested by creditors in an effort to recoup a portion of what they are owed; however, in the overwhelming majority of cases, the bankruptcy is initiated by the bankrupt individual or organization.
Purpose
The primary purpose of the laws of bankruptcy are: (1) to give an honest
debtor a "fresh start" in life by relieving the debtor of most debts, and (2) to
repay creditors in an orderly manner to the extent that the debtor has property
available for payment.
Bankruptcy allows debtors to resolve debts through the division of non-exempt
assets among creditors. Additionally the declaration of bankruptcy allows
debtors to be discharged of most of the financial obligations, after their
non-exempt assets are distributed, even if their debts have not been paid in
full. During the pendency of a bankruptcy proceeding, the "debtor" is protected
from extra-bankruptcy action by creditors by a legally imposed "stay."
History
This word is formed from the ancient Latin bancus (a bench or table), and ruptus (broken). Bank originally signified a bench, which the first bankers had in the public places, in markets, fairs, etc. on which they tolled their money, wrote their bills of exchange, etc. Hence, when a banker failed, he broke his bank, to advertise to the public that the person to whom the bank belonged was no longer in a condition to continue his business. As this practice was very frequent in Italy, it is said the term bankrupt is derived from the Italian banco rotto, broken bench (see e.g. Ponte Vecchio). Others rather choose to deduce the word from the French banque, table, and route, vestigium, trace, by metaphor from the sign left in the ground, of a table once fastened to it and now gone. On this principle they trace the origin of bankrupts from the ancient Roman mensarii or argentarii, who had their tabernae or mensae in certain public places; and who, when they fled, or made off with the money that had been entrusted to them, left only the sign or shadow of their former station behind them.
Bankruptcy fraud
Bankruptcy fraud is a business crime of filing for bankruptcy with criminal intent, that is with the intention of evading payment for goods even though the buyer has funds that could be used to pay for them, or accepting payment for goods or services but not supplying them. Common types of bankruptcy fraud include petition mills, false oath, concealment of assets, and fraudulent conveyance. Multiple filings are not per se fraudulent; as with all things in the law, it depends on the circumstances. Bankruptcy fraud should be distinguished from strategic bankruptcy, which is not a criminal act (but may prejudice a judge against the filer if there is evidence that bankruptcy is being used strategically).
Bankruptcy in Canada
Bankruptcy in Canada is set out by federal law, in the Bankruptcy and Insolvency Act and is applicable to businesses and individuals. The office of the Superintendent of Bankruptcy, a federal agency, is responsible for ensuring that bankruptcies are administered in a fair and orderly manner. Trustees in bankruptcy administer bankruptcy estates.
Duties of Trustees
Some of the duties of the trustee in bankruptcy are to:
(a) Prepare the bankruptcy documents that assign the person into bankruptcy.
(b) Review the file for any fraudulent preferences or
reviewable transactions
(c) Chair meetings of creditors
(d) Sell any non-exempt assets
(e) Perform counselling for the debtors.
(f) Object to the bankrupt's discharge.
Creditors' Meetings
Creditors become involved by attending creditors' meetings. The trustee calls
the first meeting of creditors for the following purposes:
(a) To consider the affairs of the bankrupt
(b) To affirm the appointment of the trustee or substitute
another in place thereof
(c) To appoint inspectors
(d) To give such directions to the trustee as the creditors may see fit with
reference to the administration of the estate.
Consumer Proposals - An Alternative to Personal Bankruptcy
In Canada a person can file a consumer proposal as an alternative to bankruptcy.
A consumer proposal is a negotiated settlement between a debtor and their
creditors.
A typical proposal would involve a debtor making monthy payments for a maximum
of five years, with the funds distributed to their creditors. Even though most
proposals call for payments of less than the full amount of the debt owing, in
most cases the creditors will accept the deal, because if they don’t, the next
alternative may be personal bankruptcy, where the creditors will get even less
money.
The creditors have 45 days to accept or reject the consumer proposal. Once the
proposal is accepted the debtor makes the payments to the Proposal Administrator
each month, and the creditors are prevented from taking any further legal or
collection action. If the proposal is rejected, the debtor may have no
alternative but to declare personal bankruptcy.
A consumer proposal can only be made by a debtor with debts of $75,000 or less
(not including the mortgage on their principal residence). If debts are greater
than $75,000, the proposal must be filed under Division 1 of Part III of the
Bankruptcy and Insolvency Act.
The assistance of a Proposal Administrator is required. A Proposal Administrator
is generally a licensed trustee in bankruptcy, although the Superintendent of
Bankruptcy, may appoint other people to serve as administrators.
According to the Superintendent of Bankruptcy, in 2004 84,426 consumers filed
personal bankruptcy, and 15,551 individuals filed a consumer proposal.
Bankruptcy Reform
Bankruptcy reform legislation has been passed into law with Canadian Senate
approval and Royal assent on November 25, 2005. The new law will not come into
force until June 30, 2006 at the earliest.
A summary and an analysis of the major changes are given in a link at the bottom
of this page.
Student Loans in Bankruptcy
Prior to 1997, student loans were discharged in bankruptcy. In September 1997
the Bankruptcy & Insolvency Act was amended so that student loans were only
discharged in a bankruptcy if they were more than two years old.
In 1998 the rules were changed again, increasing the time period from two years
to ten years. Under bankruptcy reform (see above) student loans will be
automatically discharged after 7 years (or 5 years with court approval). A
history of changes to the treatment of student loans in bankruptcy can be found
at Student Loan Bankruptcy.
Bankruptcy in the United Kingdom
In the United Kingdom (UK), bankruptcy (in a strict legal sense) relates only
to individuals and partnerships. Companies and other corporations enter into
differently-named legal insolvency procedures: liquidation, administration and
administrative receivership. However, the term 'bankruptcy' is often used
(incorrectly) when referring to companies in the media and in general
conversation.
A Trustee in bankruptcy must be either an Official Receiver (a civil servant) or
a licensed insolvency practitioner.
Following the introduction of the Enterprise Act 2002, a UK bankruptcy will now
normally last no longer than 12 months and may be less, if the Official Receiver
files in Court a certificate that his investigations are complete.
It is expected that the UK Government's liberalisation of the UK bankruptcy
regime will massively increase the number of bankruptcy cases; initial
Government statistics appear to bear this out. It remains to be seen whether the
leash has been loosened too far and whether the legislation will need reviewing
if the system becomes too overheated with "debt-dumping" debtors.
There were 15,394 individual insolvencies in England and Wales in the second
quarter of 2005 on a seasonally adjusted basis. This was an increase of 11.7% on
the previous quarter and an increase of 36.8% on the same period a year ago.
This was made up of 11,195 bankruptcies, an increase of 7.8% on the previous
quarter and 27.5% on the corresponding quarter of last year, and 4,199
Individual Voluntary Arrangements (IVA’s), an increase of 23.7% on the previous
quarter and an increase of 69.6% on the corresponding quarter of the previous
year.
Bankruptcy in the United States
Bankruptcy in the United States is a matter placed under Federal jurisdiction
by the United States Constitution (in Article 1, Section 8), which allows
Congress to enact "uniform laws on the subject of Bankruptcy throughout the
United States." Its implementation, however, is found in statute law. The
relevant statutes are incorporated within the Bankruptcy Code, located at Title
11 of the United States Code, and amplified by state law in the many places
where Federal law either fails to speak or defers expressly to state law.
While bankruptcy cases are always 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 highly dependent
upon State law. State law therefore plays a major role in many bankruptcy cases,
and it is often quite unwise to generalize bankruptcy issues across state lines.
Bankruptcy Chapters
There are six types of bankruptcy under the Bankruptcy Code, located at Title 11
of the United States Code:
Chapter 7 (a liquidation-style case for individuals or businesses),
Chapter 9 (Municipal bankruptcy)
Chapter 11 (a more complex rehabilitation-style case used primarily by
business debtors, but sometimes by individuals with substantial debts and
asset).
Chapter 12 (a payment plan or rehabilitation-style case for family
farmers and fishermen), and
Chapter 13 (a payment plan or rehabilitation-style case for individuals
with a regular source of income),
Chapter 15 (Ancillary and Other Cross-Border Cases)
The most common types of personal bankruptcy for individuals are Chapter 7 and
Chapter 13.
Chapter 7
Chapter 7 personal bankruptcy is also known as straight bankruptcy, or
liquidation bankruptcy. Under Chapter 7, debtors give up certain property that
they own when they go bankrupt. The property is sold, and the proceeds are used
to pay the creditors. In most cases debtors do not have any assets, and thus in
most cases they do not lose anything. In most Chapter 7 cases most debts are
discharged about 90 days after filing. Debts that are discharged (which means
they go away) include credit card debts. Debts that are not discharged would
include child support payments and some taxes and student loans. Secured debts,
such as car loans and house mortgages, are also not discharged. Under the new
rules implemented as a result of the 2005 Bankruptcy Reform, it is now more
difficult to qualify for Chapter 7 bankruptcy. Debtors are subject to a means
test, and if income exceeds limits set by the government, the debtor must file
under Chapter 13.
Chapter 13
Chapter 13 personal bankruptcy is also known as a Wage Earner Plan. Under
Chapter 13 the debtor keeps all of their property, but in return they make
regular payments to a trustee, who distributes the payments to the creditors.
Most Chapter 13 plans last for three to five years, and then the debts are
discharged. Creditors will only accept a Chapter 13 plan if it provides greater
realizations for them than a Chapter 7 plan.