Bankruptcy

Bankruptcy, legal status of a debtor whom the courts have declared unable to pay debts. Bankruptcy is regulated by federal laws that provide for an orderly adjustment when a person or business becomes insolvent. A person or business with more debts than assets and no means of meeting debt payment may declare bankruptcy. The interest of both creditors and debtor are given consideration by the court. The Constitution gives Congress the power to establish “uniform Laws on the subject of Bankruptcies throughout the United States” (Article I, Section 8). The first bankruptcy act was passed by Congress in 1800, patterned on English law. The act on which current law is based was passed in 1898. Bankruptcy may be voluntary (filed by the debtor) or involuntary (filed by creditors). When a petition of bankruptcy is filed, the court assumes control over the assets of the debtor. A custodian or trustee is appointed to oversee the debtor's property to protect it from loss. This trustee has legal ownership of all assets of the bankrupt estate except those exempt under local law. The property of the debtor must be sold and the proceeds distributed to creditors on a percentage basis. The debtor is then legally discharged from all previous obligations.