Under the Bankruptcy Act, as we shall see, creditors share equally in the assets of the estate. To be sure some creditors are preferred over others, but all creditors of the same class share equally. The filing of a petition in bankruptcy gives each creditor in the same class the same share in an insolvent's estate. In one way, of course, the creditors are prejudiced, in this, that the debts of the bankrupt are discharged, and they cannot afterwards compel him to pay what his bankrupt estate has not yielded, even though he afterwards secures assets. But it is often better for creditors to take immediately what they can get than to await the rebuilding of their debtor's fortune, whose present assets may be perhaps seized by one single creditor who has been most diligent in his race toward the debtor's present assets. The bankruptcy law provides that one creditor cannot get a preference over the others, and that all the assets of the bankrupt will be divided equally among creditors of the same class. To accomplish this end the more surely, the present law provides that all payments made to creditors at any time within four months prior to the date of filing a petition in bankruptcy shall be set aside and shall be returned by the creditors provided the creditor knew or had reasonable cause to know that a preference was intended.14
It is of course true where a creditor at the time a debt is incurred takes security, as, a chattel mortgage, the creditor is protected against loss of his debt in so far as the security is ample to cover it. Thus B applies to C for a loan. To secure the loan C exacts from B a mortgage upon B's real estate. The next day after B secures the money, certain of his creditors file a petition in bankruptcy. Here C is absolutely protected to the extent of his security. He has practically purchased an estate in B's property by which he can secure the payment of his debt. But a mortgage given
14. See SEC. 54, post to secure an already existing debt is a preference that may be avoided.
It is also true that certain liens secured by a creditor will be upheld in bankruptcy, although as a rule all liens secured through legal proceedings within four months prior to the time of filing the petition are dissolved.
These ideas will be fully developed at appropriate points.
Because the bankruptcy law is designed for the benefit of creditors, the creditors may file the petition in bankruptcy. A petition filed by creditors puts one in what is known as involuntary bankruptcy.
Another great purpose of the Bankruptcy Act is to benefit the debtor himself.
The Bankruptcy Act gives a debtor a chance to get on his feet again. So long as he has not taken the benefit of the act, he is a prey to his creditors. Every new piece of property which he accumulates becomes at once the subject of seizure by his creditors. The Bankruptcy Act provides that his debts (with some exceptions) shall be discharged. He can then get a new start, knowing that he is safe from interference by his creditors.
Because the bankruptcy law is designed for the benefit of the debtor he himself may file a petition in Bankruptcy. A proceeding so instituted is known as a case of voluntary bankruptcy.
In Hardie v. Swofford Bros. Dry Goods Co.15 the Court says:
"For these considerations, we are disposed to deny that in the present bankruptcy law the discharge of the honest debtor is a mere incident . . .; and on the contrary to assert that the release of the honest, unfortunate and insolvent debtor from the burden of his debts and restore him to business activity in the interest of his family and the general public, is one of the main, if not the most important objects of the law." 16
15. (C. C. A. 5th Cir.) 165 Fed. 588.
A discharge in bankruptcy does not discharge one of all his obligations, but only those which may be classed as debts. Debts (with a few exceptions) are discharged whether mature or not, but one's executory contracts are not affected, unless the bankruptcy proceedings operate as a breach of contract.
It may be said, it is thought, with accuracy that bankruptcy proceedings discharge obligations which are in the nature of debts, claims or liabilities, only; but it has been a point considerably mooted whether bankruptcy in itself constitutes a breach of an executory contract.17
It will perhaps give us a better understanding of our subject, to take a "bird's eye" view of the proceedings in bankruptcy under our present law, the federal act of 1898, and amendments thereto.
16. In Williams v. Fidelity Co., 236 U. S. 549, the Court says: "It is the purpose of the bankruptcy act to convert the assets of the bankrupt into cash for distribution among creditors, and then to relieve the honest debtor from the weight of oppressive indebtedness and permit him to start afresh free from obligations and responsibilities consequent upon business misfortune." See also Stellwegen v. Clum, supra, at page 616.
17. See Section 68, post.
(1) Filing of the petition. The petition in bankruptcy begins the proceedings. It may be filed by the bankrupt himself, in which case we refer to the proceedings as voluntary; or by the creditors of the bankrupt, in which case we refer to the proceedings as involuntary.
(2) Appointment of a receiver. A receiver is an officer provided for in the bankruptcy law to take temporary charge of the bankrupt's estate where its preservation requires some one to go into immediate possession pending the election of a trustee by the creditors. The receiver is appointed by the Court. We see, therefore, he is not a necessary officer and is not appointed unless the condition of the estate requires it. He may be appointed immediately upon the filing of a petition and before the adjudication.
(3) Adjudication in bankruptcy. The adjudication is the judgment of the Court that the party against whom or by whom the petition is filed is a bankrupt. In voluntary proceedings the adjudication proceeds as a matter of course in a few days. In involuntary proceedings, it follows by default unless the bankrupt resists it. He may defend that he ought not to be adjudicated a bankrupt and is entitled to a trial.
(4) Filing of schedules. The bankrupt upon his adjudication must file a list of his creditors and schedule his assets. In voluntary proceedings the schedules are filed with the petition.
(5) First meeting of creditors. The creditors hold a meeting at which they elect a trustee and examine the bankrupt.
(6) Examination of bankrupt. The bankrupt must submit to an examination in reference to his assets if the creditors demand it.
(7) Election of trustee. The trustee is the officer who takes title to the bankrupt's estate and who administers the estate. He succeeds the receiver. He is a necessary officer in cases where the bankrupt has assets above his exemptions. The trustee is elected by the creditors; he must file a bond.
(8) Collection of assets. After his election the trustee should proceed to get in all the assets of the estate, bringing suit where necessary.
(9) Proof of debt. The creditors must file proofs of their debts. These debts are allowed as a matter of course unless objections are made.
(10) Declaration of dividends. Dividends are declared and paid as we shall note hereafter.
(11) Application for discharge. The bankrupt must apply for his discharge within the time fixed by the act.
(12) Objection to discharge. Any creditor may file objections to the discharge of the bankrupt, setting up as a reason, that the bankrupt has offended against some provision of the bankruptcy law. In such a case, the objection is heard and passed upon. If sustained, the bankrupt is denied discharge in bankruptcy.
(13) Discharge. There being no objection or the objections being found baseless, the bankrupt is granted his discharge. This frees him from his dischargeable debts. Some sorts of debts are not dischargeable in bankruptcy.18
18. These items are developed at length in their appropriate places in the subsequent discussion.