Bankruptcy is the legal term used to describe the inability of an individual or an organization to repay its debts and run his business. When a company or individual file for bankruptcy the creditors get the chance to recover a part of their invested money from the government.
The condition of bankruptcy was first initiated during the reign of King Henry VIII in England. The initial law was in favor of the creditors who allowed them to take over all the assets that a trader had. Later, the law was changed to help the bankrupt organization from the clutches of its lenders.
The US bankruptcy code recognizes three main types of bankruptcy. These are enlisted in the chapters 7, 11, 12 and 13 of the law book.
- Chapter 7 - The chapter 7 of the law code talks of Liquidation bankruptcy. This type of bankruptcy says that a trustee has the right to sell assets of the debtor to repay the loans that he had taken from them and is unable to pay back. In cases where the selling of all the assets does cover the total loan amount then the remaining amount is discharged.
- Chapter 11 - Under this code, a debtor need not have to sell his assets to repay the loans but find an alternative method in which he can pay off the loans that he had taken. This law is governed by "The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005". This act gives a time limit of 120 days within which the debtor needs to place an alternative mode of repayment.
- Chapter 12 - The bankruptcy law code under this chapter covers the farmers. As in chapter 11, the farmers get the opportunity to keep their assets while planning an alternative plan for repayment of debts.
- Chapter 13 - Chapter 13 enlists the same codes of bankruptcy law as chapter 11. In this case, the law is for individuals.
Of the above four codes of law, businesses usually avoid the chapter 7 law code, since under this law, the trustee can repay the debts by selling the property of the debtors, so it becomes impossible for the debtor to continue business operations and try to restart the business. Chapter 11 and the related code are what most bankrupt organizations follow as this helps them to get an opportunity to restart their business.