What Is The Function Of Bankruptcy Law?

28 Dec What Is The Function Of Bankruptcy Law?

In discussing why bankruptcy is important, I am met with a number of viws regarding bankruptcy. For people that do not seem to have issues involving too much debt, they seem to view bankruptcy with a sort of disdain. For those who do have a lot of debt, being free of that debt is a breath of fresh air–a new lease on life. Any any rate, it is very common for misperceptions to persist with regards to bankruptcy law and practice.

A useful beginning is to consider what would happen if we did not have bankruptcy laws in the first place. How would a creditor get their money from a non-paying debtor. In England, not too terribly long ago (well, perhaps approximately200 years ago), a debtor unable or unwilling to pay his debts could be thrown in debtor’s prison. As one commentatorasserted,debtor’s prison was not to punish the debtor but to hold him for ransom. It was believed that the debtor’s family and friends would combine their assets and pay the debtor’s debt thus freeing him from debtor’s prison.

Early English and American bankruptcy laws really did not function to discharge a debtor’s debts but merely served as a means by which all of the debtor’s assets were combined into one place and liquidated. The goal behind this type of bankruptcy was to treat the debtor’s creditors equally. In essence, to avoid a piecemeal distribution of all assets, everything would be sold at once and divided up among all creditors. Many states still retain this vestige called an Assignment for the Benefit of Creditors but this procedure is rarely used. It was not until 1841 that the debtor’s right to a discharge of his debts was recognized.

While for our purposes, the discharge of debts is the most important aspect of bankruptcy, treating creditors equally is also a very important goal. Just like the old English and early American bankruptcy cases, a modern chapter 7 is similar in that an important goal is to treat creditors of a similar class equally. The purpose behind this is to avoid the rush by creditors to the courthouse to “dismember” the debtor by trying to seize assets before other creditors can. For example, a chapter 7 trustee can recover debt payments or transfers of property toa creditor if that creditor would have received more than he would have if all of the debtor’s assets were liquidated.

Bankruptcy law serves a useful and important societal function. It is important forpolicy makers to know the history of bankruptcy so as to strike a meaningful and appropriate balance between creditors and debtors.

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Adrian Lapas, Esq.

I've been practicing bankruptcy law in North Carolina since 1993, and am certified as a specialist in consumer bankruptcy law by the North Carolina State Bar.
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