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The History of Bankruptcy

In ancient times, relief from debt was unknown. The exception was within the Old Testament nation of Israel in which, every seventh year, debts were absolved regardless of the amount (Deut. 15). Until the last century, in most every culture, an indebted individual faced enslavement, often for life, or imprisonment until the debt was paid. The Continent of Australia and the British Colony of Georgia (later to become the U.S. State of Georgia) were even organized to operate as debtor prisons.

History of BankruptcyIn the U.S., a number of bankruptcy laws were enacted during times of economic upheaval, such as the Civil War, then subsequently repealed throughout the 19th century but the Great Depression in the 20th century wrought significant changes to bankruptcy law. Prior to the 1930’s, bankruptcy laws tended to favor the creditor and punish the debtor. The Bankruptcy Act of 1898 however, was the first to provide distressed companies optional protection from creditors, known as equity receivership, through which the company could be reorganized (rehabilitated). During the Great Depression, bankruptcy laws were elaborated upon with the Bankruptcy Act of 1933 and the Bankruptcy Act of 1934, the latter providing the debtor “a new opportunity in life…. unhampered by the pressure and discouragement of preexisting debt.” Local Loan Co. v. Hunt, 292 U.S. 234, 244, 54 S. Ct. 695, 675 (1934).

The Bankruptcy Reform Act of 1978 provided for strong provisions for business reorganization with Chapter 11 and revising Chapter 13 with more powerful provisions. The results made filing bankruptcy and reorganizing easier for both businesses and individuals, and created the Bankruptcy Code. The Supreme Court ruled the Act of 1978 gave bankruptcy judges too much power which could be used to overreach into other government jurisdictions. This brought about the Bankruptcy Amendment Act of 1984. Shortly after, Chapter 12 came into existence to provide for the needs of farmers facing bankruptcy, allowing them the opportunity to reorganize their debts and maintain possession of the family farm.

The Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCA) was signed into law in 2005 making significant changes to the bankruptcy code in general. This bill required debtors with the ability – those found to fail the Means Test, typically formulated as individuals who exceed their state’s median income, while reducing the income for certain attributed and estimated continuing house hold expenditures – to repay some portion of their debts. The law also created an eight-year waiting period between bankruptcy filings to prevent repeat abusers from benefitting from bankruptcy protections. Further, it mandates that individual filers must undergo credit counseling prior to filing for relief under the Bankruptcy Code and receive financial management education after filing for relief under the Bankruptcy Code.

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Bankruptcy Glossary



All tangible and intangible property that provides benefit, either real or potential, to its owner or potential owner.


A petition to place the financial affairs of an individual or a business that is having difficulties paying debts or is facing the inability to repay certain debts under the control of a bankruptcy court. Bankruptcy is defined within the scope of federal law and can be voluntary or involuntary. A Bankruptcy may be a liquidating event, or may be a court structured reorganization event, whereby some debts are repaid over successive years.

Bankruptcy Petition

Papers and associated documents that are filed with the bankruptcy court to begin the process of Bankruptcy.

Bar Date

The final date on which creditors can file a claim against a debtor within a Bankruptcy proceeding. The failure of a creditor to file a claim on or before the Bar Date may restrict the creditor from being repaid, and under certain circumstances acts as a waiver of the debt.

Chapter 7 Bankruptcy

Chapter 7 bankruptcy deals with the liquidation of certain non-exempt assets in order to pay outstanding debts to creditors. As for corporations and partnerships, the Chapter 7 acts as an event that dissolves the entity. For individuals some property may be exempt and retained, and not subject to liquidation. Additionally, certain debts, such as child support and spousal support, cannot be discharged and will survive after the Chapter 7 Bankruptcy has closed.

Chapter 11 Bankruptcy

Chapter 11 deals with reorganization of a business in which operations can be continued under the guidance of an appointed trustee. The Trustee in a Chapter 11 case is usually the owner of the company. The goal in all Chapter 11 cases is to have the Court confirm a Plan of Reorganization, which sets forth how the company will repay certain debts over successive years. This Plan of Reorganization can modify certain payment structures that currently exist for the company, including changing interest rates and time periods with which to pay (amortizations).

Chapter 13 Bankruptcy

Chapter 13 bankruptcy is a reorganization of individuals that results in a plan that pays back certain debts to creditors extended over a three to five year period, depending upon a number of factors including the individual’s income level. During this three to five year period, creditors are prohibited by law from starting or continuing debt collection actions against the debtor.

Consumer bankruptcy

A petition filed by individuals or couples for release from debts incurred for personal and family purposes (such as a home, vehicle, ordinary bills). Consumers most often file for relief under Chapter 13 and Chapter 7 bankruptcies.


A lender or financial institution to which money is owed. The relationship between the individual and the lender is that of a debtor-creditor relationship. The debtor-creditor relationship exists both within and outside of bankruptcy proceedings.


An individual or a business that owes money to a creditor, such as a lender or financial institution. The relationship between the individual and the lender is that of a debtor-creditor relationship. The debtor-creditor relationship exists both within and outside of bankruptcy proceedings.


(tax exempt) Status granted by States and/or the IRS to exclude certain organizations, persons, income, property or other items that are otherwise taxable under the law. A charitable organization is an example of a tax exempt entity.


Exemptions are dollar values of assets that individuals are entitled to retain in a Bankruptcy proceeding, or in a state court collection proceeding. Exemptions are governed by state law within North Carolina. If an asset is properly qualified as exempt, it is free from most creditor’s collection attempts, in most cases.


A legal process through which a financial institution, taxing authority, or judgment creditor forces the sale of a borrower’s collateral used to obtain a mortgage or loan when the borrower defaults or ceases payment of the loan. Foreclosures are commonly associated with the sale of real property, usually an individual’s primary residence.

Fraudulent Transfer

The giving away, or the sale of an asset owned by a debtor for substantially less than the fair market value of the asset. A fraudulent transfer is only made when either the debtor was insolvent at the time of the transfer, or the debtor intentionally made the transfer with the intent to hinder, delay, or defraud creditors. Fraudulent transfers are recoverable by trustees in bankruptcy proceedings, meaning a trustee can file a lawsuit to recover both the asset sold, and the money received, with the goal and intention of collecting these and distributing the value on a pro-rata basis to all of the debtor’s creditors. Fraudulent transfers have certain time limitations that apply to them. Certain fraudulent transfers can be brought outside of a bankruptcy proceeding.


Garnishment is obtained by a creditor by judgment or by order of the court to take the property of a debtor, most often by taking future income earnings of a debtor. In cases of garnishment of wages, the property is garnished from the debtor’s paycheck before it is received by the debtor.


The inability of a debtor to repay debts. An individual or entity is insolvent when its debts exceed its assets/income.


A levy is obtained by a creditor by judgment or by order of the court to take the property of a debtor, most often by taking monies owned by the debtor that exist in bank accounts. In cases of levying of bank accounts, the proper authorities contact the bank and freeze the account prior to the levy, to ensure that no funds are prematurely removed by the debtor.

Liquidation of assets

The act of a selling or distributing the assets of a business or individual. Liquidation of assets is common under terms of bankruptcy but may also be performed outside of bankruptcy when getting out of a business that cannot be passed on, sold as a going concern, or merged with another business. An out of court liquidation has certain advantages and disadvantages over a bankruptcy.

Means test

The method or investigation into the finances of an individual or business to determine eligibility for bankruptcy.


When an individual or business pays, within 90 days prior to the filing of a bankruptcy petition, more to one creditor than all creditors would have received on a pro-rata basis. Preferences are recoverable by trustees in bankruptcy proceedings, meaning a trustee can file a lawsuit to recover preferential payments made by a debtor, with the goal and intention of collecting those monies and distributing them on a pro-rata basis to all of the debtor’s creditors. Certain dollar limits and other exceptions apply.


The act of a creditor, most often a financial institution, taking back collateral (property) from a debtor (purchaser) for lack of payment or lack of receiving timely payments. Repossession is commonly associated with motor vehicles and equipment.


The right of set-off exists to creditors, and is usually found when a debtor has a bank account with the same bank that a debtor has a secured debt obligation (a mortgage or a car payment). The right of set-off gives the creditor the authority to reach into the debtor’s bank account and withdraw funds without the debtor’s knowledge in order to apply those monies toward a missed payment.

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