Bankruptcy in the United States
The first more lasting federal bankruptcy law, sometimes called the "Nelson Act",[7] initially entered into force in 1898.
Liquidation involves the appointment of a trustee who collects the non-exempt property of the debtor, sells it and distributes the proceeds to the creditors.
The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 added Chapter 15 (as a replacement for section 304) and deals with cross-border insolvency: foreign companies with US debts.
Involuntary petitions are rare, however, and are occasionally used in business settings to force a company into bankruptcy so that creditors can enforce their rights.
The estate consists of all property interests of the debtor at the time of case commencement, subject to certain exclusions and exemptions.
[13] For federal income tax purposes, the bankruptcy estate of an individual in a Chapter 7 or 11 case is a separate taxable entity from the debtor.
[17] Each judge is appointed for a term of 14 years by the United States Court of Appeals for the circuit in which the applicable district is located.
The automatic stay generally prohibits the commencement, enforcement or appeal of actions and judgments, judicial or administrative, against a debtor for the collection of a claim that arose prior to the filing of the bankruptcy petition.
The court must either grant the motion or provide adequate protection to the secured creditor that the value of their collateral will not decrease during the stay.
If the debtor's business were facing a temporary crunch, but were nevertheless viable in the long term, it might not survive a "run" by creditors.
While this "reach back" period typically extends 90 days backwards from the date of the bankruptcy, the amount of time is longer in the case of "insiders"—typically one year.
For instance, the statute of limitations within bankruptcy is two years as opposed to a shorter time frame in some non-bankruptcy contexts.
But where the debtor purchased the residence with all of their available funds, leaving no money to live off, that presumed that the conversion was temporary, indicating a fraudulent transfer.
The Supreme Court has recognized an exception to the absolute priority rule known as the "new value" exception that allows junior stakeholders to recover property under a plan over the objection of senior creditors if the junior stakeholders provide "new value" to the restructured enterprise (typically defined as an upfront monetary contribution to the reorganized debtor that is commensurate with the property received or retained under the plan).
In some states, exempt property includes equity in a home or car, tools of the trade, and some personal effects.
In situations where the debtor (rather than the creditor) is allowed to benefit from the increase in collateral value, the effect is called "lien stripping" or "paring down".
Lien stripping is allowed only in certain cases depending on the kind of collateral and the particular chapter of the Code under which the discharge is granted.
Certain taxes owed to federal, state or local government, student loans, and child support obligations are not dischargeable.
Any debt tainted by one of a variety of wrongful acts recognized by the Bankruptcy Code, including defalcation, or consumer purchases or cash advances above a certain amount incurred a short time before filing, cannot be discharged.
Which debts are discharged, and how equity and other entitlements are distributed to various groups of investors, typically turns on valuation issues.
Banks and other deposit institutions, insurance companies, railroads, and certain other financial institutions and entities regulated by the federal and state governments, and Private and Personal Trusts, except Statutory Business Trusts, as permitted by some States, cannot be a debtor under the Bankruptcy Code.
[54] Knowingly and fraudulently concealing property of the estate from a custodian, trustee, marshal, or other court officer is a separate offense, and may also be punishable by a fine, or by up to five years in prison, or both.
[56] Any person who receives income directly or indirectly derived from a "pattern" of such racketeering activity (generally, two or more offensive acts within a ten-year period) and who uses or invests any part of that income in the acquisition, establishment, or operation of any enterprise engaged in (or affecting) interstate or foreign commerce may be punished by up to twenty years in prison.
On January 23, 2006, the Supreme Court, in Central Virginia Community College v. Katz, declined to apply state sovereign immunity from Seminole Tribe v. Florida,[58] to defeat a trustee's action under 11 U.S.C.
The Court ruled that Article I, section 8, clause 4 of the U.S. Constitution (empowering Congress to establish uniform laws on the subject of bankruptcy) abrogates the state's sovereign immunity in suits to recover preferential payments.
Critical illness insurance Association report June 2, 2020 Corporate bankruptcy can arise as a result of two broad categories—business failure or financial distress.
The actual causes of corporate bankruptcies are difficult to establish, due to the compounding effects of external (macroeconomic, industry) and internal (business or financial) factors.
However, some studies have indicated that financial leverage and working capital mismanagement are likely two of the major causes of corporate failure and bankruptcy in the US.
[65] The largest bankruptcy in U.S. history occurred on September 15, 2008, when Lehman Brothers Holdings Inc. filed for Chapter 11 protection with more than $639 billion in assets.
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