Getting to Know Bankruptcy

by Investing School on July 8, 2010

Bankruptcy is a legal state in which you are unable to pay your creditors. The state of bankruptcy can apply to individuals or companies and organizations. Creditors can initiate bankruptcy action against a debtor by petitioning “involuntary bankruptcy” in an effort to recoup some of what is owed. This can also facilitate a restructuring of a company. However, debtors usually voluntarily file for bankruptcy.

The concept of bankruptcy began in England. In fact, the first bankruptcy law was enacted in 1542. Bankruptcy first came into being as a way to help creditors and not debtors which is the case today. During this time, creditors were allowed to take all the assets of a borrower who was not able to pay his debts. To add insult to injury, the debtor would be imprisoned for failure to pay his debts. This is after he has lost all of his possessions. This, however, usually forced other family members to try and come up with the money that was needed in order to pay the debtor.

Voluntary bankruptcy legislation in the United States was enacted in 1841. From this legislation came the modern relationship between the debtor and creditor. Bankruptcy Reform of 1978 which is now referred to as the Bankruptcy Code completely overhauled the bankruptcy system. The most changes in this legislation applied to the court system.

While the system is in place to protect the debtor there are those who would take advantage of the law. There are companies and individuals who commit bankruptcy fraud. This is done by filing for bankruptcy but failing to reveal all assets and either concealing or destroying financial documents and so forth.

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