The dictionary definition of “bankruptcy” is: “a statutory procedure by which a usually insolvent debtor obtains financial relief and undergoes a judicially supervised reorganization or liquidation of the debtor’s assets for the benefit of creditors.”
A statutory procedure is one created by law. Bankruptcy proceedings are governed by the Bankruptcy Code, which is found in Title 11 of the United States Code. It is a federal statute, passed by Congress, which traces its roots back to the 1890s.
“obtains financial relief”
One of the truisms of bankruptcy is that the entire purpose behind the process is for the debtor to obtain a fresh start. In that sense, bankruptcy provides an opportunity for a debtor to ask for relief from their debts and an opportunity to a financial restart.
Bankruptcy proceedings are subject to judicial oversight. Bankruptcy judges are a subunit of the federal district courts whose primary concern is the efficient and orderly administration of bankruptcy proceedings.
“reorganization or liquidation”
These concepts deserve far greater attention than I am giving them here, but there are two broad types of bankruptcy proceedings—a reorganization (or rehabilitation) or a liquidation. In a liquidation case, a trustee will collect the nonexempt property of the debtor and convert that property to cash to distribution to creditors. In a reorganization case, creditors look to the debtor’s future earnings to pay off the claims.
The bankruptcy process weighs benefits and burdens. On the one hand, a debtor benefits from the “financial relief” from their debt obligations. The benefit of that relief, however, is not without its burden. To obtain relief, a debtor must subject their assets (sometimes only their nonexempt assets) to the bankruptcy process.
“for the benefit of creditors”
One of the primary aspects of any bankruptcy proceeding is the orderly distribution to creditors. While creditors may not get every penny they are owed, the bankruptcy process is as much for their benefit as it is for a debtor’s. In many instances, creditors would prefer the debtor to be in bankruptcy, which would guarantee a supervised process.