Bankruptcy Law
The bankruptcy system provides an orderly structure for addressing the inability of an individual or organization to meet its monetary obligations. Whether through liquidation and sale of assets or by restructuring and reorganization to allow an orderly payment of debts, the bankruptcy system governs the obligations and rights of creditors (lenders or others to whom a debt is owed) and debtors (borrowers or recipients of credit, goods, or services). The framers of the U.S. Constitution (Article 1, Section 8) granted Congress the power to establish a uniform bankruptcy law throughout the United States. Bankruptcy law is set forth in the complex federal statutes of the U.S. Bankruptcy Code (Title 11, United States Code) which governs bankruptcy practice. Bankruptcies are processed through the U.S. Bankruptcy Court (part of the federal court system) and cases are appealed to the U.S. District Courts and U.S. Court of Appeals.
The purpose of the bankruptcy system is to provide overburdened individuals and organizations with an opportunity to resolve and reorder their financial affairs while providing protection for their creditors. In February 1999 the Associated Press reported that more Americans filed for bankruptcy in 1998 than ever before; more than 1.39 million individuals and 44,000 businesses sought protection from creditors in bankruptcy. Bankruptcy lawyers who represent debtors guide their clients through the statutory framework that provides relief from the lenders to whom their clients are financially indebted. Bankruptcy lawyers who represent creditors attempt to protect their clients' interests by securing the maximum recovery possible from a debtor, whether the debtor is an individual or a business.
The bankruptcy system is intended to be a last resort for individuals or organizations that cannot meet their monetary obligations. Debtors are given a limited opportunity to resolve their financial obligation without resort to the debtors' prison that were common in England in the days of Charles Dickens (and vividly described in Dickens' novels). However, in order to avoid abuse and overuse of the opportunity the system provides, bankruptcy may only be declared by individuals once every seven years, and bankruptcy of an organization is closely controlled and monitored by the bankruptcy court and trustee (a person appointed by the court to oversee the business involved in the bankruptcy). In opting for reorganization or liquidation, a business is subjected to strict control by the court and trustee and is subject to the intervention of creditors in some daily business decisions.
Some organizations have used bankruptcy as a way to relieve themselves of the burdens of mass tort litigation. For example, Johns-Mansville used bankruptcy to resolve millions of dollars of claims resulting from the sale of asbestos. Similarly, Dow Corning used bankruptcy to provide relief from millions of dollars of potential liability in breast-implant litigation. Texaco sought relief in the bankruptcy system to continue operations in the face of a multibillion dollar verdict in a commercial dispute with Pennzoil. Steel companies and railroads have proceeded through bankruptcy reorganization as a way to manage the large debt owed to unfunded pension plans.
Reproduced from The Official Guide to Legal Specialties with permission. (c) 2000 Thomson Reuters/West. For additional information on this publication please visit 
http://west.thomson.com/products/law-students. Copyright granted via e-mail by Donna Gies, September 16, 2008.