Bankruptcy and Insolvency
Order Instructions:
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.
SAMPLE ANSWER
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 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 as well as some job related tools and equipment. The debtor is also allowed some pension, social security, welfare, unemployment and other veteran benefits.
References
Local Loan Co. v Hunt, 292 U.S. 234, 244 (1934)
Debt.org (n.d) America’s Debt Help Organization retrieved on 24 February 2015 from http://www.debt.org/bankruptcy/
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