Bankruptcy is a legal process that provides debtors with an option to resolve their debts. It is a legal process wherein a firm or an individual is unable to pay his debts. Financially distressed individuals and firms may both adopt this procedure. Bankruptcy law provides the legal framework which may be adopted by the firm or an individual when their liabilities are more than their assets.
In the United States, the Bankruptcy Law is a federal law and is therefore governed by the United States Code. The proceedings under the Bankruptcy code starts with the filing in the federal bankruptcy courts of a bankruptcy petition by a debtor. Such filing should be made in a federal bankruptcy Court where the individual is domiciled or resident of where the principal office of the Company is situated. The firm or individual who files the bankruptcy petition is known as the debtor.
The filing of Bankruptcy petition under the Bankruptcy Code puts an automatic stay on all other legal proceedings against the debtor and his properties by any creditor. This is one of the most important components of Bankruptcy proceedings. The automatic stay on such proceedings gives the debtor the opportunity to reorganize his debts and start afresh. Furthermore each type of Bankruptcy proceeding offers discharge of certain kind of debts and such discharge depends each of the chapters in the Code.
The Bankruptcy Code envisages several types of bankruptcy proceedings for firms and individuals. These proceedings provide either for liquidation or re-organization of debts. Chapter 7 provides for liquidation, Chapter 11 for re-organization, and Chapter 12 deals with family farmers and family fisherman. These provisions are available for both individuals and legal entities. Chapter 13 permits individuals who are conducting business in their own names to reorganize the assets and liabilities of their business as well as their own. Chapter 12 and Chapter 13 are the more preferred options to Chapter 11, if the debts are within the limits prescribed within these provisions.
Bankruptcy proceedings are one of the several options that are available to a financially distressed firm or individual and must be adopted after careful analysis of the financial situation of such firm or individual.
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