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Encyclopedia > Receivership

Bankruptcy is a legally declared inability or impairment of ability of an individual or organization to pay their creditors. A declared state of bankruptcy can be requested or initiated by the bankrupt individual or organisation, or it can be requested by creditors in an effort to recoup a portion of what they are owed.

The primary purpose of the laws of bankruptcy are: (1) to give an honest debtor a "fresh start" in life by relieving the debtor of most debts, and (2) to repay creditors in an orderly manner to the extent that the debtor has property available for payment.

Bankruptcy allows the debtor to resolve his debts through the division of his assets among his creditors. Additionally the declaration of bankruptcy allows debtors to be discharged of most of the financial obligations, after their assets are distributed, even if their debts have not been paid in full. During the pendency of a bankruptcy proceeding, the "Debtor" is protected from extra-Bankruptcy action by creditors by a legally imposed "stay."

In the United Kingdom (UK), a Trustee in bankruptcy must be either an Official Receiver (a civil servant) or a licensed insolvency practitioner.

Following the introduction of the Enterprise Act, a UK bankruptcy will now normally last no longer than 12 months and may be less, if the Official Receiver files in Court a certificate that his investigations are complete.

It is expected that the UK Government's liberalisation of the UK bankruptcy regime will massively increase the number of bankruptcy cases; initial Government statistics appear to bear this out. It remains to be seen whether the leash has been loosened too far and whether the legislation will need reviewing if the system becomes too overheated with debt-dumping debtors.


Bankruptcy in the United States

Bankruptcy is federal statutory law (Title 11 of the United States Code) based upon the Constitutional requirement for "uniform laws on the subject of Bankruptcy throughout the United States." (Article I, Section 8). Bankruptcy proceedings are undertaken in the United States Bankruptcy Courts, part of the District Court system.

There are several types of proceedings that fit under the general category bankruptcy. The U S Bankruptcy Code has multiple chapters, each describing a different procedure available for debt resolution. Liquidation under a Chapter 7 filing is the most common form of bankruptcy. Liquidation involves the appointment of a trustee who collects the non-exempt property of the debtor, sells it and distributes the proceeds to the creditors. Bankruptcy under Chapter 11, Chapter 12, or Chapter 13 is more complex and involves allowing the debtor to use future earnings to pay off creditors. In addition, there is Chapter 9 bankruptcy, available only to municipalities; perhaps the most famous example of a municipal bankruptcy was in Orange County, California. Chapter 9 is a form of reorganization, not liquidation. Chapter 12 is somewhat like Chapter 13 but is only available to farmers in certain situations. As recently as mid-2004 Chapter 12 was scheduled to expire but in late 2004 it was given a renewed lease on life.

Bankruptcy can be entered into voluntarily by the debtor. It can also be commenced involuntarily by as few as one creditor if the debt owed is large enough. An involuntary bankruptcy may be used as a collection tool but its use can be very risky and, if wielded improperly, may subject the creditor to large damages.

Some property is exempt from being sold to pay debts in a bankruptcy. The law varies greatly from state to state. In some states, exempt property includes equity in a home or car, tools of the trade, and some amount of personal effects. In other states an asset class such as tools of trade will not be exempt by virtue of its class except to the extent it is claimed under a more general exemption for personal property.

One major purpose of bankruptcy is to ensure orderly and reasonable management of debt. Thus, exemptions for personal effects are thought to prevent punitive seizures of personal items of little or no economic value (diary, toothbrush, ordinary clothing), since this does not promote any desirable economic result. Similarly, tools of the trade may, depending on the available exemptions, be a permitted exemption as their continued possession allows the insolvent debtor to move forward into productive work as soon as possible.

Not every debt may be discharged under every chapter of the Code. Certain taxes owed to Federal, state or local government, government guaranteed student loans, and support obligations are not dischargeable (but nb., guaranteed student loans are potentially dischargeable should the debtor prevail in a difficult-to-win adversary proceeding brought in the nature of a complaint to determine dischargeability that's brought against the lender)). The debtor's liability on a Secured debt, such as a mortgage or mechanics lien on a home, may be discharged, but the effects of the mortgage or mechanics lien cannot be discharged in most cases if it affixed prior to filing, so if the debtor wishes to retain the property, the debt must usually be paid for as agreed. (See also lien avoidance, reaffirmation agreement)(Note: there may be additional flexiblity available in Chapter 13 for debtors dealing with oversecured collateral such as a financed auto, so long as the oversecured proptery is not the debtor's primary residence.)

Also, any debt tainted by one of a variety of wrongful acts recognized by the Bankruptcy code, including defalcation, or consumer purchases or cash advances above a certain amount incurred a short time before filing, cannot be discharged. However, certain kinds of debt, such as debts incurred by way of fraud, may be dischargeable through the Chapter 13 super discharge. All in all, as of late 2004, there are 19 general categories of debt that cannot be discharged in a Chapter 7 bankruptcy, and fewer debts that cannot be discharged under Chapter 13.

Bankruptcy fraud

Bankruptcy fraud is a federal crime. Its provisions are found at Title 18 of the United States Code. Bankruptcy fraud is prosecuted by the United States Attorney, typically after a reference from the United States Trustee, the Interim Trustee, or a bankruptcy judge.

When bankruptcy is filed with criminal intent, as bankruptcy fraud, a business crime, the debtor may be subject to a felony prosecution in federal court. This should be distinguished from strategic bankruptcy, which is not a criminal act. Common types of bankruptcy fraud include petition mills, false oath, concealment of assets, fraudalent conveyance, etc. Multiple filings are not per se fraudalent; as with all things in the law, it depends on the circumstances.

See also

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In one case, a triple-decker was written up in a petition for receivership in 2000, and it took just under two years until the owners abandoned their efforts to reclaim it from CRC.
If a homeowner convinces the court that repairs are unaffordable and receivership is instituted immediately, the work is done as soon as possible, and repayment may take anywhere from six to 12 months, with the homeowner sometimes being able to plea for some accommodation to stretch out the deadlines.
She believes that the past few years were an opportune time to begin the receivership initiative, and encourages other cities to take advantage of the climate while it lasts.
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Frye said she finally decided receivership was the way to go late Friday after hearing that the board had failed to reach a decision on giving up the documents.
Her position on receivership edges her closer to the thinking of one of her mayoral rivals, lawyer Pat Shea, who asserts that San Diego's only hope of untangling its finances lies in a municipal bankruptcy filing.
Rather, receivership is undertaken in cases where the management of an entity is deeply flawed – acting improperly, incompetently or illegally.
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