Insolvency is a legal status of someone or organization that cannot repay the debts it owes to lenders. In many jurisdictions, bankruptcy is imposed by a court order, often started by the debtor.
Insolvency is not the legal status that is only that organization or an insolvent individual may have, and the term bankruptcy is hence not a synonym. In some countries, including the Uk, bankruptcy is restricted to people, and other forms of insolvency proceedings (such as management and liquidation) are applied to companies. To formal insolvency proceedings, bankruptcy is applied more generally in America.
Insolvency in the United States is a matter put under national authority by the United States Constitution (in Article 1, Section 8, Clause 4), which permits Congress to enact “uniform laws on the subject of bankruptcies through the United States”. The Congress has enacted statutes governing insolvency, mainly in the shape of the Bankruptcy Code, located.
State law therefore plays an important role in many bankruptcy cases, and it is frequently difficult to generalise bankruptcy law.
Ordinarily, a debtor declares bankruptcy to obtain relief from debt, and this is achieved through a discharge or through a restructuring. Normally, when a debtor files a voluntary petition, his or her bankruptcy case commences.
There are six kinds of bankruptcy under the Bankruptcy Code, located at Title 11 of the United States Code:
Chapter 7: basic liquidation for individuals and businesses; also known as straight bankruptcy; it is the simplest and quickest form of bankruptcy accessible
Chapter 9: municipal bankruptcy; a federal mechanism for the resolution of debts that are municipal
Chapter 11: sometimes by individuals with significant debts and assets; known as corporate bankruptcy, although reorganisation or rehabilitation, used primarily by company debtors, this is a type of corporate financial reorganisation which generally allows businesses to continue to function while debt repayment strategies are followed by them
Chapter 12: rehabilitation for fishermen and family farmers;
Chapter 15: other international cases and ancillary; helps foreign debtors to clear debts and supplies a mechanism for dealing with bankruptcy debtors.