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The Purpose of Bankruptcy

The primary purpose of bankruptcy is: (1) to give an honest debtor a "fresh start" in life by relieving the debtor of most debts, and (2) to repay creditors in an orderly manner to the extent that the debtor has the means available for payment. Bankruptcy allows debtors to be discharged from the legal obligation to pay most debts by submitting their non-exempt assets, if any, to the jurisdiction of the bankruptcy court for eventual distribution among their creditors. There are two common forms of bankruptcy: liquidation and reorganization. In the United States the law provides for one liquidation chapter (chapter 7); all other chapters are for reorganization (chapter 9- municipalities, chapter 11- businesses or individuals, chapter 12- family farmers, chapter 13- individual "wage earners".) During the pendency of a bankruptcy preceding the debtor is protected from most non-bankruptcy legal action by creditors through a legally imposed stay.  Creditors cannot pursue most types of lawsuits, garnish wages, or attempt to compel payment. Here are quotes taken from actual U.S. Supreme Court cases: "The principal purpose of the Bankruptcy Code is to grant a 'fresh start' to the 'honest but unfortunate debtor'." 1 (Year 2007) "The central purpose of the [Bankruptcy] Code is to provide a procedure by which certain insolvent debtors can reorder their affairs, make peace with their creditors, and enjoy 'a new opportunity in life with a clear field for future effort, unhampered by the pressure and discouragement of preexisting debt."2 (Year 1991) "One of the primary purposes of the Bankruptcy Act is to 'relieve the honest debtor from the weight of oppressive indebtedness, and permit him to start a fresh free from the obligations and responsibilities consequent upon business misfortunes'. This purpose of the act has been again and again emphasized by the courts as being of public as well as private interest, in that it gives to the honest but unfortunate debtor..., a new opportunity in life and a clear field for future effort, unhampered by the pressure and discouragement of pre-existing debt." 3 (Year 1934) "It is the purpose of the bankrupt act...to relieve the honest debtor from the weight of oppressive indebtedness, and permit him to start afresh free from the obligations and responsibilities consequent upon business misfortunes." U.S. Supreme Court (Year 1915)4 1 Marrama v. Citizens Bank of Massachusetts, 127 S.Ct. 1105 (2007) 2 Grogan v. Garner, 111 S.Ct. 654 (1991) 3 Local Loan Co. v. Hunt, 54 S.Ct. 695 (1934) 4 Williams v. U.S. Fidelity & Guaranty Co., 35 S.Ct. 289(1915), citing Wetmore v. Markoe, 196 U.S. 68 (1904); Zavelo v. Reeves, 227 U.S. 625 (1913); and Burlingham v. Crouse, 228 U.S. 459 (1913).