Bankruptcy: Introduction

Origin and Purpose

The origin of the word bankruptcy can be traced back to Italy during the Medieval Period. In those days, when a businessman was unable to pay his debts, the practice at that time was to destroy his trading bench. From the term "broken bench" or "banca rotta" comes the word "bankruptcy".

Back then, tradesmen unable to repay their debts were dealt with harshly. The primary focus in that period was on recovering the interests of the creditors, not the welfare of the debtor. In Old England, for example, penalties could be draconian and range from imprisonment (debtors prison) to the death penalty.

In the US, early bankruptcy laws were temporary measures passed in response to harsh economic conditions. In general, when economic conditions improved, bankruptcy laws were repealed. In modern days, bankruptcy laws became permanent and have been periodically amended or revised to meet current economic and political conditions.

The Bankruptcy Act of 1898 was the first piece of modern day legislation to extend protection to corporations from creditors and is the foundation of today's bankruptcy laws. Since 1898 there have been many acts and revisions: Bankruptcy Act of 1933 and 1934 during the Great Depression; Chandler Act of 1938; 1978, the first major overhaul since the Chandler Act; 1980 Bankruptcy Tax Act; 1984 amendments to the 1978 Act; the 1994 overhaul of the 1978 Act.

From there the laws have evolved until recently, as of 2001, new legislation is pending in congress to make it more difficult for consumers to file a chapter 7 bankruptcy (complete dismissal) and force them into chapter 13 (reorganization) repayment plan.

Bankruptcy today seeks the dual purpose of benefiting the debtor as well as the creditor by finding a happy medium where the debtor can comfortably meet their monthly obligation and the creditors recoup their investment. 

The main emphasis is on rehabilitating the debtor (reorganization) who is in distress. The laws in place today protect two different segments of our society, the business sector, both profit and non-profit, and the consumer.

The following links will cover more details about each chapter (7,11,13) and help you decide if filing is right for you.

In general, you don't need bankruptcy if there are no assets a creditor with a judgment can attach, or your assets are exempt.


Bankruptcy Court Illinois


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