Understanding Bankruptcy – it’s History and Role in Major Economies
Bankruptcy refers to the financial state of a business or individual. When a person or a business declares bankruptcy, this often means that their current debts outpace their earnings that the possibility of paying the creditors back is very minimal. As much as possible, businesses avoid this state because this would signal the end of their current business model or the company would end up being sold to another company. Personal bankruptcy would have a lasting effect on a person’s credit standing which limits their access to basic services on credit.
But bankruptcy is not entirely a bad situation for businesses. Although it’s true that the business would end up being taken over by another company for a different purpose, many businesses have used bankruptcy to restructure their business model and financial planning to be more efficient. For personal bankruptcy, it is a chance to start fresh as the debtor could seek some form of arrangement for paying the debt without excessive constraints on personal income.
History of Bankruptcy
The earliest forms of declaration of bankruptcy are from Europe. This was made into law in 1542 by King Henry VIII. But even though the law was enacted during the Middle Ages, the practice on dealing with bankruptcy has existed before that year. The only difference is on how the debtors and creditors settle the debt.
The early models on bankruptcy are used in favor of the creditors. They have to be paid in some form no matter what happens to the debtor. The law made by Henry VIII sanctions imprisonment for those who are unable to pay for their debts while the family finds other ways to pay for the outstanding debt. More often than not, the family seeks employment and part of their wages is collected in behalf of the debtor.
In other cultures, bankruptcy is dealt with debt slavery. Simply put; the debtor and his or her family works for the creditor on a specific time period until their debt is deemed paid. There are also records indicating that Genghis Khan created a law that warrants death for those who are unable to pay for their debts three times.
The early signs of the shift of relationship between creditors and debtors with regards to debt in bankruptcy started with voluntary bankruptcy. Until mid-1800s, voluntary bankruptcy or an act wherein a business declares itself on a debt-ridden financial state was unknown. But the development of laws and regulations on how to deal with bankruptcy propelled this concept for businesses. In US, the modern form of bankruptcy was established with the Bankruptcy Act of 1938 which practically laid out the basis for proceedings in dealing with a bankrupt business.
Laws on Bankruptcy in Major Economies
- Australia – Australia started their modern bankruptcy system through the Bankruptcy Act of 1966. Personal bankruptcy exists but, to be qualified, a person needs to have more than $5,000 in debt. Business bankruptcies are ultimately liquidated or taken over through administration. Aside from personal bankruptcy and insolvency, businesses could also enter into debt agreement to prevent insolvency and complete takeover by a government arm. The government arm in charge for bankruptcy is Insolvency and Trustee Service Australia.
- Canada - the current system for dealing with bankruptcy in Canada was established through Bankruptcy and Insolvency Act in 1985. The process of creating an agreement with bankruptcy is done with the aid of a trustee or a third party arbitrator. The role of a trustee is to protect two parties (debtor and creditor) from abuse, sell any items or properties allowed by law for debt payment and to determine if the declaration of bankruptcy is legal.
In Canada, a person can ask for a “consumer proposal”. This is practically a form of debt settlement that could prevent the declaration of bankruptcy.
- China – the first laws that dealt with bankruptcy was passed in 1986. However, this was only considered as a trial implementation to determine if there are any loopholes of the system. This was drastically changed in June 2007 which provides comprehensive ruling and guide on how to deal with a business declaring bankruptcy. It should be noted thought the laws passed in China is not applicable in Hong Kong and Macau.
- United Kingdom – there are there types of bankruptcy laws in UK and they depend on location as each has promulgated their own proceedings: England and Wales, Scotland and Northern Ireland. However, the difference in these proceedings is only on minor details. In Scotland, bankruptcy is referred as sequestration. A common trait for bankruptcy is that the term itself is only applied for individuals and partnerships while businesses have a different approach on debt settlement or liquidation. It is also possible for a creditor to petition that a specific individual be placed on bankruptcy if they are unable to pay for their debt.
Fraud in Bankruptcy
Businesses and individuals have to be careful in declaring bankruptcy as they could be susceptible to fraud which could result to imprisonment. Fraud usually happens when businesses and individuals conceal or hide some of their assets for auditing. Many hide their assets to protect it from redistribution to creditors. It is very important to declare every item especially those of value. Any item of value could be used against a business or individual if they are not properly declared. The charges of fraud are not only limited for entities under bankruptcy but even after they have cleared their payment.