An Overview of the Bankruptcy Code and the Bankruptcy Practice in the United States


The United States bankruptcy process has been both hailed and criticized around the world. It has been held out as a model of fairness — fairness to the debtor, who is provided with a fresh start, and fairness to creditors, who share equally in recoveries. It has been criticized as enabling failing companies to “limp along” and have unfair competitive advantage over their international counterparts, and for enabling Americans to incur far more debt than they can manage without serious consequences. Regardless, it does appear that much of the developed world sees the benefits of the American experience and has tried to bring their laws more into line with American principles. Certainly, the United States has had a long experience with debtor-creditor relations and with bankruptcies, even providing in its Constitution that a person cannot be jailed for failing to pay a debt. Most American insolvency professionals believe that the present bankruptcy system represents a highly effective, equitable, and important body of American law. Although many different insolvency mechanisms exist in the United States, including those provided by the laws of the fifty states, the most important insolvency mechanism is undoubtedly the bankruptcy process as codified in the United States Bankruptcy Code. What follows below is an overview of this law and some of the more important provisions and applications of the Bankruptcy Code.

Bankruptcy is fundamentally an equitable proceeding. The bankruptcy judge has substantial discretion in ruling on the numerous issues and disputes presented in a typical bankruptcy proceeding. At the same time, the Bankruptcy Code establishes and enforces specific legal rights and obligations in which the equitable bankruptcy proceedings are framed, thereby providing a legal matrix by which one’s legal rights can be ascertained, protected, and prosecuted. This enables parties to anticipate what the results of court intervention might be, in order to encourage parties to work out their own resolution wherever possible. Accordingly, the bankruptcy process is not a roving process to do equity, but is a controlled, preset process, with clearly delineated boundaries, inside of which the parties have great flexibility to arrive at their own solutions, and in which the bankruptcy court, together with its substantial equitable powers, exists for the purpose of adjudicating disputes if consensual resolutions are not reached.

The Bankruptcy Code is designed to achieve several overriding and fundamental policies. Perhaps most importantly, bankruptcy provides a “fresh start” to the debtor by way of a discharge of debt. It provides this benefit only to the “honest debtor,” while holding the less than honest debtor accountable to the system and to his creditors. In exchange for the benefit of a “fresh start,” the debtor is obligated to give a full, complete, detailed, accurate, and truthful disclosure concerning his financial affairs. At the same time, bankruptcy protects creditors by preventing a “race to courthouse,” i.e., one creditor collecting on his claim ahead of all others. The Bankruptcy Code embodies the fundamental principle of the “equality of creditors,” while still preserving lien and other rights. The rights of all parties are protected by the transparent nature of the bankruptcy process, meaning that any significant action can be taken only after it is approved by the court, after all parties have received notice thereof and have had a reasonable opportunity to object and to be heard on the proposed action.

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