Page 20 - Bankruptcy Volume 1

Chapter 4

Overview of Bankruptcy

The United States Supreme Court, in Local Loan Co. v. Hunt, 292 U.S. 234, (1934), clearly stated the
goal of U.S. bankruptcy law in its decision, which provided that "[I]t gives to the honest but unfortunate
debtor...a new opportunity in life and a clear field for future effort, unhampered by the pressure and dis-
couragement of preexisting debt." A bankruptcy filing is a legal action, taken by an individual, partner-
ship, corporation, governmental unit, or other entity, which is intended to protect or preserve the assets
of the applicable entity through either reorganization or orderly liquidation. Accountants and their finan-
cial acumen are of vital importance to debtors in this process.

The theories underlying the Bankruptcy Code are simple and as follows:

 Where applicable, avoid the "tragedy of the commons" by instituting a system whereby creditors
of a debtor are incentivized to work together to their common benefit.

 Afford the debtor a fresh start so that past failures do not unduly hinder future society-benefitting
activities.

 Promote economic efficiency through efficient reorganization of assets.

The accountant’s role in a bankruptcy is typically providing assistance to a debtor or advising an official
committee of creditors or one or more creditors. An accountant’s exposure to bankruptcy can also come
as a creditor of a debtor (that is, one that has provided services to the debtor). In either event, it be-
hooves the accountant to understand

 the rules;

 the players;

 the playing field; and

 the significant events or milestones in the bankruptcy case.

The Rules — The Bankruptcy Code

The current law governing bankruptcy in the United States is the Bankruptcy Reform Act of 1978, as pe-
riodically amended (the Bankruptcy Code). The Bankruptcy Code is the law upon which most modern
decisions are based. The most recent and significant amendment is the Bankruptcy Abuse Prevention
and Consumer Protection Act of 2005 (BAPCPA), which is discussed elsewhere in these chapters.

The Bankruptcy Code is divided into nine chapters: 1, 3, 5, 7, 9, 11, 12, 13 and 15. Chapters 1, 3, and 5
feature general provisions and definitions applicable to all proceedings under the Bankruptcy Code (with
certain exceptions related to proceedings under Chapter 9). Chapters 7, 9, 11, 12, and 13 include the op-
erative material for an eligible debtor (business, government, or individual) seeking protection under
such chapter of the Bankruptcy Code. Chapter 15 relates to a proceeding commenced in the United

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