Bankruptcy
Bankruptcy law was created initially to enable persons inundated with debt to have a new beginning. It is also designed to permit individuals and business entities to have additional time to pay and compromise existing debts without liquidating all assets. The U.S. Constitution, Article 1, Section 8(4) grants the power exclusively to Congress "[T]o establish… uniform laws on the subject of bankruptcies throughout the United States." The current Code is based on the Bankruptcy Reform Act of 1978 as amended. Bankruptcy Courts, under the supervision of U.S. District Courts, administer petitions under the statute.
The Code is divided into a number of chapters, the most important of which are Chapter 7 ("Liquidation"), Chapter 11, ("Reorganization"), and Chapter 13, ("Adjustment of Debts of an Individual with Regular Income"). The remaining chapters concern definitions, case administration, a discussion of creditors' claims, debtors' duties, estate of the debtor, U.S. trustees, municipal indebtedness, and debts of farm families.
Chapter 7: Liquidation
A Chapter 7 proceeding is "bankruptcy" as envisioned by most persons. The crux of such a proceeding is the collection and reduction to cash of all nonexempt assets owned by the debtor; the monies, to the extent available, are distributed to classes of creditors.
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