Bankruptcy

English legal practice in the 18th century sent numerous destitute and insolvent people to debtor's prisons until they paid the debt. With no way [Page 55]to work to earn money for repaying their debt(s), they would languish or die in debtor's prison. James Oglethorpe, who had investigated debtor's prisons while serving as a member of Parliament, was deeply moved by the sufferings and abuses that he witnessed among the prisoners. As a result of his findings of abysmal conditions, he took a leading role in organizing a company that sponsored a refuge for debtors. In 1732, King George II gave James Oglethorpe a charter to create this new colony in America, which he would name Georgia. As a consequence, the state of Georgia has included in its constitution a ban against imprisonment for debt.

General James Oglethorpe was the colonial representative from England's King George II to the American colonies. Deeply moved by the sufferings of bankrupt prisoners in England, he created a refuge for debtors in America, a colony that he named Georgia. Since that time, the state of Georgia has included a constitutional ban on imprisonment for debt.

Bankruptcy provides an alternative legal remedy to debtor's prison. Insolvent debtors can find refuge and relief from their creditors through bankruptcy, including bankruptcy law protections enforced by the courts that allow for reorganization and time for eventual repayment. Totally insolvent debtors with no reasonable hope of repaying their debts may find relief from their insolvency by the court excusing their debts. Depending on the court decision, bankrupt debtors may be required to undergo psychological counseling, financial counseling, and other remedies that will reduce their likelihood of repeating unsound spending practices.

Modern business and bankruptcy practices often seek to reorganize a company's finances. Instead of liquidation of all assets and distribution to creditors, reorganization allows a business or government to continue to operate. The insolvent entity, when declared bankrupt, is given legal protection by the bankruptcy courts from creditors. It also provides an organized way for creditors to have an opportunity to be repaid. In some cases, bankruptcy gives persons or others owed money for taxes, wages, services, or goods to be able to collect payment.

In the case of companies that are not liquidated, they will be required to reorganize their operations, possibly restructure their debts with their creditors (usually with the aid of the court), and other remedies that will enable the company to re-enter the economy as a productive enterprise.

Around 1900, the U.S. Congress moved to federalize bankruptcy cases under Article 1, Section 8, Clause 4, of the U.S. Constitution. This section allows Congress to enact “uniform laws on the subject of bankruptcies throughout the United States.” Today the subject of bankruptcy law is located in the U.S. Code at Title 11. Bankruptcy courts are legislative courts created by Congress under Article I of the Constitution. The judges are appointed of a set number of years.

Title 11 of the Bankruptcy Code has several chapters. Chapter 11 is for business rehabilitation, whereas Chapter 13 is rehabilitation for individuals. In Chapter 11 and 13 cases, the individual or the business retains ownership of the assets and develops a repayment plan that is agreeable to the court.

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