A bankrupt or insolvent is an individual who is unable to pay his debts since his liabilities exceed assets. Bankruptcy law facilitates the distribution of assets of such debtor among his creditors proportionately. Instead the law protects the debtor from creditor harassment by relieving him from the obligation to repay his balance debts.
In some jurisdictions or States the insolvency laws allows the debtor to stay in business so that the income generated from there can be used for further repayment of his accumulated debts.
In order to have uniform bankruptcy laws throughout United States, the Congress passed the Bankruptcy Code contained in Title 11 of the United States Code. However, States can make laws on other aspects of debtor creditor relationship except bankruptcy.
The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 was passed by the Congress and signed into law by the President in April 2005.
The forum for bankruptcy proceedings is the United States Bankruptcy Courts. The United States Trustees set up by the Congress take care of the ministerial and administrative duties in connection with bankruptcy proceedings.
Bankruptcy proceedings can be initiated either by the defaulting debtor or the aggrieved creditor. On commencement such proceedings a trustee is appointed to take charge of the assets of the debtor. During the continuance of bankruptcy proceedings creditors are not allowed to recover their dues outside such proceedings and the concerned debtor is not allowed to transfer or alienate his assets or properties. Even transfer of assets made or third party interests or encumbrances to properties created by the debtor immediately before the commencement of bankruptcy proceedings stand cancelled in law.
Broadly there are two types of bankruptcy proceedings. In ‘liquidation’ the trustee collects the dues of the defaulting debtor and sells off his properties for distribution of the proceeds proportionately among the creditors. However, the US Supreme Court has held that Individual Retirement Account of any debtor is protected and exempt from bankruptcy proceedings and hence cannot be touched by the trustee. In ‘rehabilitation’ the debtor is allowed to use his income stream to further clear off his debts.