Bankruptcy Law


The “Bankruptcy Code,” or federal legislation, controls the majority of bankruptcy law in the United States. The United States Constitution grants Congress the power to adopt “uniform Laws on the Subject of Bankruptcies throughout the United States” (Article 1, Section 8, Clause 4).

The creation of a plan under bankruptcy law enables a debtor who is unable to pay his creditors to settle his debts by allocating his assets to them. This controlled split enables some degree of equality in the treatment of the interests of all creditors. The release of a particular debtor from outstanding financial obligation after the distribution of assets.


In the United States, more than 1 million people have filed for bankruptcy every year since 1996. In exchange for having their assets auctioned to pay their creditors, the majority of people want a debt discharge. The rest ask bankruptcy courts for help in negotiating terms with their creditors. For the most of the 19th century, the United States did not have bankruptcy laws, so most debtors were unable to pay their debts. Debtors in the early 20th century may have expected even harsher penalties, including imprisonment for their preparation.

American bankruptcy law history, from 1789 to 1978:

Date Events
1789 The Constitution empowers Congress to enact uniform laws on the subject of bankruptcy.
1800 The law allows only for involuntary bankruptcy of traders.
1803 The First bankruptcy law is repealed amid complaints of excessive expenses and corruption.
1841 A Second bankruptcy law was enacted in the wake of the panics of 1837 and 1839. The law recognizes both voluntary and involuntary bankruptcy.
1843 The 1841 Bankruptcy Act was repealed, amid complaints about expenses and corruption.
1867 Spurred by the Panic of 1857 and demands for bankruptcy during the Civil War, Congress enacted the Third Bankruptcy Act.
1874 The 1867 Bankruptcy Act is amended to allow for compositions.
1878 The 1867 Bankruptcy Law is repealed.
1889 The National Convention of Representatives of Commercial Bodies is formed to lobby for bankruptcy legislation. The president of the Convention, Jay L. Torrey, draughts a bankruptcy bill.
1898 Congress passes a bankruptcy bill based on the Torrey bill.
1933-1934 The 1898 Bankruptcy Act was amended to include railroad reorganization, corporate reorganization, and individual debtor arrangements.
1938 The Chandler Act amended the Bankruptcy Act of 1898 to create a menu of options for both corporate and unincorporated debtors.
1978 The 1898 Bankruptcy Act was replaced by the Bankruptcy Reform Act.


Bankruptcy Petitions, 1867-1872


Years Petitions
1867 7345
1868 29539
1869 5921
1870 4301
1871 5438
1872 6074


The 19 different kinds of debts that cannot be dismissed in bankruptcy are listed in the U.S. Bankruptcy Code:
  • Support for children and alimony.
  • a few overdue taxes, like tax liens. However, if it is several years old, you may be subject to some federal, state, and local taxes.
  • Liability for willful damage to another person or his property; “willful and malicious” in this context refers to unprovoked and willful acts.
  • Debts not declared in bankruptcy.
  • common and upkeep costs for the condo association (or similar).

About Bankruptcy?

An individual or a person with a big belly can file for bankruptcy if they are unable to pay their liabilities or have other serious problems. A substance is registered for the benefit of an individual. Every debtor’s possessions have been analyzed and assessed, and any or all of the debt may be paid with the aid of the assets.

Key takeaways:

  • A legal procedure known as bankruptcy is used to release people or companies from their obligations while giving creditors a chance to be repaid.
  • The U.S. Bankruptcy Code includes rules used when dealing with bankruptcy cases in federal courts.
  • There are many types of bankruptcy, usually identified by the chapter of the U.S. Bankruptcy Code to which they belong.

Apprehension Bankruptcy: 

According to theory, the option to declare bankruptcy helps the entire economy by giving individuals and businesses a second chance to obtain credit and by giving creditors a share of the debt repayment.

Chapter 7:

People who have few or no assets, including some firms and individuals, typically apply for Chapter 7 bankruptcy. They are able to get rid of their unsecured debts, including credit card debt and medical expenses. People who only hold exempt assets and a personal vehicle valued up to a certain amount, may find they are unable to pay their unsecured debt.

Chapter 9 :

Municipalities in financial difficulties, including cities, towns, villages, counties, and school districts, are eligible for bankruptcy. Under Chapter 9, cities may arrange for repayment over time, having to liquidate assets to cover their debts.

Chapter 10:

This chapter replaces bankruptcy, a type of corporate bankruptcy that was effectively abolished in 1978.

Chapter 11:

Businesses frequently file for Chapter 11 bankruptcy with the intention of restructuring, continuing in operation, and regaining profitability. A corporation can make plans for profitability, make expense reductions, and find new methods to boost income by filing for Chapter 11 bankruptcy.

Chapter 12:

Farms and fisheries owned by families can benefit from bankruptcy. They are permitted to continue operating their enterprises as they develop a strategy to pay off their debts.

Chapter 13:

Chapter 13, often known as a wage earner’s plan, is a bankruptcy option available to those who earn too much money to qualify under Chapter 7 bankruptcy law. The repayment schedules often take place over a three-to five-year period in instalments. The courts permit these debtors to retain all of their property, even ordinarily nonexempt property, in return for paying back their creditors.

Chapter 15:

To settle cross-border cases, which may involve debtors, assets, creditors and other parties possibly located in multiple countries, bankruptcy was introduced into the law in 2005. Typically, this kind of petition is submitted in the debtor’s country of residence.

Bankruptcy: Pros and Cons


  • It allows debtors to emerge from default.
  • Cleaner certain unsecured debts.
  • It avoids legal judgment.


  • Leaves a scar on one’s credit score.
  • Secured debts will have the collateral seized.
  • Certain debts like child support are not eligible for discharge.
  • Alternatives to Bankruptcy.


The bankruptcy will be on your credit record for seven to ten years, and it will have a significant and immediate negative impact on your credit score. This implies that borrowing money for items like a business or home may be challenging, more expensive, or perhaps impossible. Bankruptcy carries a social stigma that some people may perceive as a symptom of character faults or unreliability. Unfortunately, bankruptcy may be the best option for certain individuals or companies. The alternative to liquidating all of your assets and facing court judgement for non-payment or contract breaches may be necessary if debts grow to be too enormous to handle.

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