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The original Bankruptcy Act was enacted in 1878. Unlike European countries, American debtors were not punished in any way. Our founders viewed bankruptcy from a different perspective; therefore, they included a provision in the U.S. Constitution, which gives Congress the authority to establish uniform bankruptcy laws. The primary purpose of the Bankruptcy Code is to provide debtors an opportunity for a fresh start'. In order to have a fresh start the debtor is relieved from legal responsibility of past debts.
Under the code, debtors are protected against abusive creditor activities. Once a voluntary or involuntary petition is filed, certain actions by creditors are suspended under automatic stay. Both secured and unsecured creditors are suspended from taking any action against the debtor or the debtor's property. However, actions to recover child support or alimony are not suspended.
In a situation in which there are both secured and unsecured creditors, there is a special interest in preventing creditors from obtaining an unfair advantage over other creditors. Unsecured creditors must file a proof of claim' this document states the amount of the creditor's claim against the debtor. Secured creditors are not required to file a proof of claim unless the amount of claim exceeds the value of the collateral. Voidable transfers are another form of protection between creditors. Preferential transfers or liens made to a creditor by the debtor within 90 days before bankruptcy can be voidable if creditor receives more from the transfer than it would from the liquidation.
Under the Code creditors are protected from any actions of the debtor that would diminish the value of the bankruptcy estate. A secured creditor can petition for a relief from stay. This is granted in situations involving depreciating collateral that is not protected during the bankruptcy proceedings. In general the court will order the debtor to make cash payments in the amount of the depreciation or grant additional liens. If the debtor cannot make payments, or does not have other collateral, the court will grant the creditor an indubitable equivalent' in which there is a guarantee from a solvent party.
Distribution of property and discharge of debts provides for the speedy, efficient, and equitable distribution of the debtor's nonexempt property to claim holders. Secured creditors have priority over unsecured creditors. The secured party has the choice of 1-accepting the collateral in full satisfaction of the debt. 2-Foreclosing on collateral. Or 3- allow trustee to sell collateral and remit proceeds to him/her. After property is distributed among secured and unsecured creditors (if there is enough to satisfy their claims), all other unpaid claims are discharged. In other words, the debtor is released from legal responsibility for those claims.
Chapter 11 of the Bankruptcy Code provides a method of reorganization bankruptcy. The goal of this type of bankruptcy is to reorganize the debtor with a new capital structure so that it will emerge from bankruptcy as a viable concern. Thus businesses filing for Chapter 11 are not forced to close; instead they continue to operate (debtor-in-possession) under the watchful eyes of the creditors. A plan of reorganization must be filed with the bankruptcy court. This plan outlines the proposed capital structure for the debtor to have when emerging from bankruptcy. Reorganization bankruptcy preserves existing business relations.