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A BRIEF OVERVIEW OF BANKRUPTCY IN THE UNITED STATES

Bankruptcy began as a creditor's remedy, but eventually evolved into a source of relief for debtors from financial distress. The bankruptcy law in the United States was most recently revised in the Bankruptcy Reform Act of 1978 (BRA), effective in 1979. The law is found at 11 U.S.C.A. s101 et. seq. That law has been amended numerous times since its effective date. Among the most important changes were those effected by the so-called "consumer credit" amendments enacted in 1984. The BRA is usually re ferred to as the "code" to distinguish it from the "act," which is its predecessor the Bankruptcy Act of 1896. The BRA is supplemented in considerable detail by the Bankruptcy Rules. There also are Official Forms that must be used by debtors and credito rs to take various actions and to otherwise participate in a bankruptcy proceeding. The BRA, Rules and Forms, together with court decisions interpreting them, comprise the federal bankruptcy law.

Present bankruptcy law provides essentially for four types of proceedings. The most common is a Chapter 7 or a liquidation bankruptcy. In a Chapter 7, a trustee gathers all the debtor's assets that are not exempt by state or federal law and distributes the assets to satisfy debts existing on the date the bankruptcy is commenced. Secured creditors must be satisfied "off the top," meaning that they get dollar for dollar on they claims, to the extent they hold enforceable interests in property subject to the bankruptcy. Next in line are priority claims, which include the administrative expenses associated with the bankruptcy and certain other special claims such as many types of taxes and unsecured claims for wages. Finally, the claims of unsecured, non-priority claims share in whatever assets remain on a pro rata basis. The last is the law's embodiment of one of its ostensible purposes which is to deviate from nonbankruptcy law's acceptance of debtor preferences among creditors by providing that creditors should share equally in a debtor's estate.

The requirement that secured creditors, and to a lesser extent that priority claims, be satisfied before any other claims are paid clearly undermines the equitable distribution objective and in many bankruptcies, especially consumer bankruptcies, there may be little or nothing for creditors generally. This situation is mitigated to some exent by the fact that trustees (and to a much lesser degree, debtors) are armed with a range of powers that may be used to upset a secured claim and leave the putative secured creditor with an unsecured claim that must share in the debtor's estate along with other unsecured general creditors.

However little or much creditors receive in a bankruptcy, a debtor usually is entitled to a discharge. A discharge relieves a debtor of responsibility for most debts existing on the date the petition is filed. Certain debts, such as those for alimony and support and most student loan obligations, are excepted from the discharge. In rare circumstances, such as where the debtor has committed a "bankruptcy crime," the debtor may be denied a discharge entirely. The discharge is the law's embodiment of what is probably the most important purpose of bankruptcy, namely, to give the debtor a "fresh start" financially. [insert explanations for Chapters 11, 12 and 13 also 9]