Bankruptcy refers to the inability of a debtor to pay his creditors, there are two forms of bankruptcy and they include voluntary bankruptcy and involuntary bankruptcy. In voluntary bankruptcy a debtor declares his inability to pay his creditors, on the other hand involuntary bankruptcy involves creditors suing the debtor on failing to pay them. Recently the United States has experienced the largest bankruptcy case of the Lehman brothers’ holdings which has over 636 billion dollars in assets, this is the largest case in US history and it was voluntary bankruptcy where the company seeks to be protected by chapter eleven.

This concept originated from Italy where in the past bankers placed a bench in public areas which was referred to as bancus, when the banker could not continue with his business he or she would break his bench and therefore the Italians this to as bancus raptus which means broken bank. This practice was also evident in other regions example where by 1596 Spain had declared some of its four states bankrupt, in Asia individuals faced the death penalty if they became bankrupt more than three times.

This paper discusses the origin of bankruptcy, the bankruptcy process, the consequences of bankruptcy, bankruptcy relief and the bankruptcy chapters as per the united state constitution and the 1978 and 2005 amendments on these acts. The paper also discusses bankruptcy crimes which involve debtors concealing information.



Origin of bankruptcy:

Early in Italy bakers used to place benches in public areas where they would draw bills, count money and write letters, these bankers were wealthy individuals in the society and this made the public to have confidence in depositing their property with them. The banker wrote a note which was evidence of property held and assured the same amount on demand. The paper was transferable and this note would at any time exchange the note for money.

However when there was a doubt about the note or when the banker could not continue with his business then the note value would be worthless and would no longer be transferable for business purposes. In Italy the bench used by the banker in public was referred to as bancus, when the banker broke his bank then this would be referred bancus raptus which means broken bank which is today referred to as bankruptcy.

Bankruptcy laws were put in place to protect creditors. The laws encourage payment of debts to creditors, however recently the amendments have also helped protect individual debtors through the various acts present. It ensures that creditors recover their owed amount through the sale of the debtors’ assets or through installments over a given period of time.



Bankruptcy process:

There is a procedure that is followed by whether the debtor or creditors when filing a petition, the first step is that the court receives the petition either from the debtor of the creditor, this is presented in federal courts because state courts do not handle bankruptcy cases, the court assigns a trustee whose duty will be to chair meetings, sell assets and distribute the amount recovered among creditors. The trustee shares the debtor and creditor meetings and the debtor is required to provide information regarding all his assets, if the debtor provides all the information without concealing information then he will be eligible to the relief of a portion of the debt.

Depending on the arrangement the trustees duty is to distribute the funds to the creditors, when the assets are sold according to chapter seven then the trustee distributes the amount among creditors, however according to chapter 13 where the debtor is required to give a portion of his income over a specified period then the debtor must pay the trustee this amount who will then distribute the amount. Therefore the debtor does not directly deal with the creditor which is now the duty of the trustees.

Advantages and disadvantages of bankruptcy:



There are various negative and positive consequences when an individual or organization is declared bankrupt, one of the consequences is that the debtor who is declared bankrupt loses control of his assets, this means that the assets are sold in order to pay creditors and in some cases the business or company is controlled by creditors. The other consequence is that the individual may not hold an office in some organization, example one cannot become a director in a company or even hold a public office. Finally another consequence is that when one is declared bankrupt one may face problems borrowing and this may last for some years after the court declares a debtor bankrupt. The following are the advantages and disadvantages of bankruptcy.

Disadvantages of bankruptcy:

There are various disadvantages of being declared bankrupt and they include the fact that the bankrupt individual may loose all his assets; this means that the individual will loose his assets whereby they will be sold in order to pay creditors.

The other disadvantage is that the individual will loose status and therefore may not be in a position to hold any office example individuals may be rejected in many institutions where they may want to work. Finally the other disadvantage is that the debtor is fully investigated and findings are presented in public hearings and therefore the declaration is made public.



Advantages of bankruptcy:

Despite the many disadvantages associated with bankruptcy there are some advantages of bankruptcy. One of the advantages of being declared bankrupt is that the individuals is given peace of mind because the creditors deal with the trustees selected by the court and therefore the debtor does not deal with his creditors directly, also a debtor is given an opportunity to have a fresh start. The other advantage is that when the debtor assets are zero then the debts are automatically written off after being declared bankrupt, also in some cases the debtor may keep some of his assets.

Bankruptcy relief:

The bankruptcy relief and they are explained in the US constitution, chapter seven provides individual relief where it states that debtors assets will liquidated and the amount distributed among the creditors, however if the debtor has no assets then the amount owed by the debtor is zero.



For chapter 13 it provides relief where a debtor is allowed to restructure his payment to his creditors over a specified period, in this case no assets are sold and the debtor pays the debts in a given period, the income of the debtor is analyzed and the surplus income pays his debts. Chapter nine provide reorganization plan for municipalities, Chapter twelve states the reorganization plan for farmers and fishermen, chapter fifteen provides guidelines on actions regarding companies located abroad with debts in the US. These chapters are discussed below:

Chapters on bankruptcy:

Chapter seven states that a debtor should surrender all his assets to the bankruptcy trustee, however there are some assets that are not surrendered that are not included such as household goods, the trustee then sells the assets and shares the amount among the creditors, the debtor is then relieved of the debt but the chapter also states that this relief is only available after eight years. For this reason therefore this chapter provides guidelines on how the court acts on individual bankruptcy cases.

Chapter thirteen of the bankruptcy code states that the debtor will retain all his assets, however the debtor must have a portion of his income that will service his debts in the future, the court analyses the debtors income and determines the surplus income that will be shared among creditors over a given period of time, the chapter also states that for those creditors that are secured then they will receive greater pay.

Chapter eleven states that a debtor will retain ownership and the control over assets and business while the debtor and the creditors work in court to come up with a plan of action. Chapter nine provide guidelines on the reorganization plan for municipalities, this chapter states that a municipality should not be liquidated but reorganized in order to pay creditors. An example of this is the Orange County. Chapter twelve states the reorganization plan for farmers and fishermen chapter fifteen states actions on companies located abroad with debts in the US.



The above discussed chapters provide the guidelines regarding bankruptcies on individual, organization and municipals. They provide the type of relief available to individuals and organizations in the United States. However there have been amendments on these chapters over the years namely the 1978 amendment and the 2005 amendment. These amendments are discussed below.

The bankruptcy act amendments:

In 1978 there was an amendment of the bankruptcy act which replaced the Nelson act which was put in place in 1898.In 2005 there was an amendment on the bankruptcy act, this act made it difficult for debtors to receive relief under chapter seven whereby the debtor has to wait for 8 years before receiving a debt relief under chapter seven; however this amendment also made it possible for debtors to receive relief under chapter 13. The amendment also made individuals to undergo credit canceling before filing a petition under chapter 7 and chapter 13.



Bankruptcy fraud:

Bankruptcy fraud involve filing for bankruptcy as a way to conceal schemes, it involves providing false information in court and is punishable, it occurs when a debtor conceals information from the trustee. Individuals will engage in such acts in order to benefit from such cases and they may face imprisonment or fine penalties in court, however bankruptcy fraud is confused with strategic bankruptcy which is not a crime.

Liquidation and bankruptcy:

Liquidation is a process that involves a company business being brought to an end; there are two types of liquidation which include voluntary and compulsory liquidation. Liquidation involves the presentation of a petition in court by the company or the creditors. A company is liquidated if it is unable to pay its debts and this makes it similar to bankruptcy cases, the purposes of liquidation may vary whereby liquidation may be due to the fact that it is equitable and just to liquidate, liquidation is similar to bankruptcy where liquidation occurs as a result of inability to pay its creditors.




The bankruptcy concept first originated from Italy where the word bankruptcy refers to Bancus raptus which in Italy means broken bank, this was the word that described the result of bankers’ inability to continue with their business and therefore breaking the bench they previously used to undertake their business. There are various advantages and disadvantages associated with bankruptcy, advantages are that the debtor is given peace of mind because he does not now deal directly with the creditors, opportunity to have a fresh start and when the debtor assets are zero then the debts are automatically written off. Disadvantages include the fact that bankrupt individuals their assets, debtors loose status and are not allowed to hold public offices and finally that the debtor may have difficulties acquiring future loans or mortgages.

bankruptcy relief is spelt out in chapter seven which provide individual relief where the debtors assets will liquidated and the amount distributed among the creditors and the debtor will keep some of his assets, chapter 13 it provides that debtors restructure their payment to creditors over a specified period.


Catherine Kian (1994) Bankruptcy Law and Practice, Butterworth publishers, New York

Chuck Stewart (2006) Bankrupt your student loans and other discharge strategies, McGraw Hill press, New York

Harris Levin (2004) Guide to Bankruptcy and Debtor Relief, Prentice Hall publishers, New York

Samuel Whitney (2005) Bankruptcy: A Study in Comparative Legislation, Harvard University Press, Harvard

Scott Sandage (2005) History of Failure in America, Harvard University Press, Harvard



Simon Berry and Tim Olsen (2002) Liquidation and Bankruptcy, McGraw Hill press, New York