Law of commerce
Describe bankruptcy and describe insolvency, including the roles of difference parties, the steps in the
process, the sales and distribution of the assets, and any wrongdoings of the debtor.
Introduction
Bankruptcy refers to the legal status of an entity or a person who cannot repay all the debts owed
to a creditor. Bankruptcy is mostly declared by the courts or initiated by the debtor himself.
Insolvency mostly occurs in a situation where a company or an individual cannot honor his entire
financial obligation mostly due to inadequate financial resources. In the financial world it relates
to situation where all the company’s total liabilities have exceeded its total assets and the net
worth of the business is negative.
The major goal of the bankruptcy laws as enacted the US congress was is to provide the debtors
with a clean and fresh financial start from the burdensome debts as in the case of Local Loan Co.
v Hunt, 292 U.S. 234, 244 (1934). There are six types bankruptcy in the US that are provided
under the Bankruptcy code and which are named as per the chapter that describes their nature.
These are chapter 7, 9, 11, 12, 13 among others. The different forms of bankruptcy, allows the
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debtors opportunities to arrange for different settlements including loans rescheduling, and asset
financing.
The processes of bankruptcy are different depending on the two main types of bankruptcies.
Where the bankruptcy has been instituted by the debtor by petitioning the courts, then the court
will appoint a receiver manager to be in charge of the debtor’s estate and evaluate all the options
available before deciding on the best settlement. However, if the creditors have petitioned the
court to have the company or an individual declared bankrupt then the court will set a hearing
date and all the parties in the bankruptcy case would be given equal opportunity to present their
cases in court (Debt.org, n.d).
The parties to a bankruptcy case are mostly made up of the estate’s receiver manager, the debtor
and the creditors. The major role of the receiver manager is to exploit all ways of reviving the
company and pay off all the creditors or to dispose of the assets and pay the creditors in a
predetermined way and as provided for under the bankruptcy act. The first to be paid off are the
secured creditors, then the preferential stock holder and debenture holders the finally the
ordinary stock holders. The role of the creditors is to agree on a suitable system that can resolve
the bankruptcy situation amicably where all the parties have consented. The role of the debtor is
to cooperate and provide all the details of the assets. In the event that the debtor is dishonest and
tries to hide or exclude other assets from the receiver manager then the courts can impose heavy
fines or impose an imprison term on the debtor.
Bankruptcy leads to the discharge of all debts owed but the bankruptcy remains in the debtor’s
debtor’s credit report for almost ten years as in the case of chapter 7 while in chapter 13 is seven
years. However, one is entitled to $16500 for equity payments one’s house and $2575 for the car
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as well as some job related tools and equipment. The debtor is also allowed some pension, social
security, welfare, unemployment and other veteran benefits.
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References
Local Loan Co. v Hunt, 292 U.S. 234, 244 (1934)
Debt.org (n.d) America’s Debt Help Organization
