Act of Bankruptcy in the United States

Act of Bankruptcy Definition

An act which subjects a person to be proceeded against as a bankrupt. The acts of bankruptcy enumerated in the bankruptcy act of 1898, § 3, are:

• concealment, transfer, or removal of property with intent to hinder, delay, or defraud creditors;
• transfer of property while insolvent, with intent to give a preference;
• permitting, while insolvent, a creditor to obtain a preference by legal proceedings, and not vacating such preference within five days;
• making a general assignment for the benefit of creditors;
• admitting, in writing, inability to pay debts, and willingness to be adjudged a bankrupt.  (this definition of Act Of Bankruptcy is based on The Cyclopedic Law Dictionary.)

History

After much fragmentary legislation the bankruptcy system of the United States is now embodied in the National Bankruptcy Act of 1898, as amended by the act of 1903. The acts of bankruptcy under the act may be summarized as follows: where a debtor

• removes any of his property to hinder or delay his creditors;
• being insolvent, transfers property with intent to prefer a creditor;
• suffers any creditor to obtain a preference;
• makes a general assignment for the benefit of his creditors;
• “admits in writing his inability to pay his debts and his willingness to be adjudicated a bankrupt on that ground.”

These acts of bankruptcy do not include, it will be observed, non-payment by a debtor of his debts. A debtor can therefore only be adjudicated a bankrupt on the ground of indebtedness with his own consent in writing. Presumably the legislature thought that the desire to obtain the protection and privilege of bankruptcy would be a sufficient inducement to confess insolvency, where such insolvency, in fact, exists.

To constitute a fraudulent preference it is not necessary, as it is under English law, that the payment should be made “with a view to prefer” the favoured creditor. It is enough that the creditor is preferred. This avoids the nice questions of legal casuistry which have embarrassed the English courts, and it is the more rational rule, for creditors are not concerned with a debtor’s intention. Any person, trader or non-trader, may avail himself of the act, but, in the case of a corporation, there is this peculiarity: it may be petitioned against but cannot petition.

Insolvency is construed in a practical sense; that is, a person is insolvent where the aggregate of his property, at a fair valuation, is insufficient to pay his debts; but he is not necessarily insolvent because his realized assets are insufficient to meet his liabilities.

Involuntary proceedings can only be taken against debtors owing $1000 or over, with certain exceptions. A petitioning creditor’s debt must amount to $500.

The administration of the law of bankruptcy is entrusted to the district courts and is exercised through the medium of certain officers appointed by the courts and called referees. The creditors appoint a trustee or trustees of the estate.

So soon as his judicial examination is over the bankrupt may offer his creditors a composition, but to take effect the composition must be approved by the court after hearing objections.

The discharge is the key to the efficiency of every bankruptcy system. By the control which the court thus holds, it is enabled to bring its moral censorship to bear on a debtor’s conduct and so maintain a high standard of commercial integrity.

Under the United States system the judge is to investigate the merits of the application and to discharge the bankrupt, unless he has:

• committed an offence punishable by imprisonment;
• with intent to conceal his financial condition, destroyed, concealed, or failed to keep books of account or records from which such condition might be ascertained; or
• “obtained property on credit from any person upon a materially false statement in writing made to such person for the purpose of obtaining such property on credit”; or
• “at any time, subsequent to the first day of the four months immediately preceding the filing of the petition, transferred, removed, destroyed or concealed any of his property with intent to hinder, delay or defraud his creditors”; or
• “in voluntary proceedings been granted a discharge in bankruptcy within six years”; or
• “in the course of proceedings in bankruptcy refused to obey any lawful order of or to answer any material question approved by the court.”

It is significant that the italicized qualifications were added to the act of 1898 by the experience of five years of its working.

Source: Encyclopedia Britannica (1911)

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