bankruptcy, in law, settlement of the liabilities of a person or organization wholly or partially unable to meet financial obligations. The purposes are to distribute, through a court-appointed receiver, the bankrupt's assets equitably among creditors and, in most instances, to discharge the debtor from further liability. In the United States, bankruptcy is controlled by a federal law adopted in 1898 and amended several times, as by the Chandler Act (1938) and the Bankruptcy Reform Act (1978).

Bankruptcy proceedings may be voluntary (instituted by the debtor) or involuntary (instituted by creditors). The debtor may be insolvent—i.e., unable to pay all debts even if the full value of all assets were realized—or may become insolvent when current obligations mature. Bankruptcy is also permitted when the discharge of debts would otherwise be unduly delayed, e.g., if the debtor has fraudulently transferred property to put it out of a creditor's reach. When a person or corporation has declared or been adjudged bankrupt, preferred creditors (e.g., unpaid employees, or the federal government) are paid in full, and the other creditors share the proceeds of remaining assets.

The bankrupt individual receives more lenient treatment in the United States than in perhaps any other country, so that business initiative is not stifled by the threat of criminal or civil penalties following unintentional commercial failure. This ideal is evident in Chapter 11 of the bankruptcy code, which permits courts to reorganize the assets of failing businesses instead of ordering complete liquidation of these assets. The 1978 revision of the code made it easier for corporate management to remain in control of a company during reorganization. These more lenient provisions led to a rapid increase in filings in the 1980s and 1990s. In 2005 Congress passed a significant revision of the bankruptcy code affecting individuals, prompted in part by the increase in filings since 1978. Under the new law, it is harder for an individual to file a Chapter 7 bankruptcy, which extinguishes a person's debts, and it is easier for creditors to secure repayment of a debt over time. The changes were strongly supported by banks and credit card companies, but were also criticized by a number of bankruptcy experts for placing additional burdens on middle income families while not closing loopholes that benefit bankrupt corporations and wealthy individuals. Chapter 9 of the code provides for the reorganization of bankrupt municipalities.

See study by T. Jackson (1986).

The Columbia Encyclopedia, 6th ed. Copyright© 2018, The Columbia University Press.

Bankruptcy: Selected full-text books and articles

Muddy Property: Generating and Protecting Information Privacy Norms in Bankruptcy By Janger, Edward J William and Mary Law Review, Vol. 44, No. 4, March 2003
Kickin'em While They're Down: Consumer Bankruptcy Reform By Waller, William Journal of Economic Issues, Vol. 35, No. 4, December 2001
The End of Bankruptcy By Baird, Douglas G.; Rasmussen, Robert K Stanford Law Review, Vol. 55, No. 3, December 2002
The Politics of Lawmaking in Post-Mao China: Institutions, Processes, and Democratic Prospects By Murray Scot Tanner Clarendon Press, 1999
Librarian's tip: Chap. 7 "The Case of the Enterprise Bankruptcy Law"
Debt, Financial Fragility, and Systemic Risk By E. Philip Davis Clarendon Press, 1995 (Revised edition)
Librarian's tip: "Costs of Bankruptcy" begins on p. 44
Firms, Contracts, and Financial Structure By Oliver Hart Clarendon Press, 1995
Librarian's tip: Chap. 7 "Bankruptcy Procedure"
A Contract Theory Approach to Business Bankruptcy By Schwartz, Alan The Yale Law Journal, Vol. 107, No. 6, April 1998
Real Options in Capital Investment: Models, Strategies, and Applications By Lenos Trigeorgis Praeger Publishers, 1995
Librarian's tip: Chap. 17 "Default Risk in the Contingent Claims Model of Debt"
Insolvency in Private International Law: National and International Approaches By Ian F. Fletcher Oxford University Press, 1999
Librarian's tip: 7.2 "Rules of International Jurisdiction: The Opening of a Bankruptcy"
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