Bankruptcy is the legally declared inability or impaired ability of an individual or organization to pay creditors. Creditors may file a bankruptcy petition against a debtor (an “involuntary bankruptcy”) in an effort to recover a portion of what they are owed or to restructure debts. In most cases, however, the bankruptcy petition is filed by the debtor (a “voluntary bankruptcy”).
There are many theories about the origin of the word bankruptcy. Some say it derives from the Latin bancus (“bench” or “table”) and ruptus (“broken”) and refers to the ancient Greek custom of breaking a banker’s bench in the public market or fair when the banker went out of business. Bench-breaking was a common practice in Italy, and it is also said that the term bankrupt derives from the Italian banco rotto (“broken bank”). The word may also derive from the French banque (“table”) and route (“vestige”or “trace”), referring to the mark left on the ground where a defunct banker’s table had been. Under this theory, the word bankrupts is traced to the ancient Roman mensarii or argentarii, who had tabernae or mensae in public places; and who, when they fled or made off with the money that had been entrusted to them, left only the marks or shadows of their banks behind.
In the United States, Bankruptcy is a creation of the Article 1, Section 8, Clause 4 of the Constitution, which allows Congress to enact “uniform laws on the subject of bankruptcies throughout the United States.” The Bankruptcy Code enacted by Congress is contained in Title 11 of the United States Code. Bankruptcy law is a matter of federal law, and bankruptcy cases are always filed in the United States Bankruptcy Courts. However, in some instances the Code expressly defers to state law. In particular, the validity of claims and exemptions are often dependent on state law. Because the validity of claims and exemptions constitute the factual core of a bankruptcy, it is often impossible to generalize from state to state about bankruptcy law.
Title 11 creates six types of bankruptcy:
* Chapter 7: liquidation (of individuals and businesses);
* Chapter 9: adjustment of debts of a municipality;
* Chapter 11: reorganization (primarily of business debtors, but sometimes of individuals with substantial debts and assets);
* Chapter 12: adjustment of debts of a family farmer and fisherman with regular annual income;
* Chapter 13: adjustment of debts of an individual with regular income;
* Chapter 15: ancillary and other cross-border cases.
The most common types of personal bankruptcy for individuals are Chapter 7 and Chapter 13. The majority of consumer bankruptcies are liquidations filed under Chapter 7. Corporations and other business forms file under Chapters 7 or 11.
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