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Bankruptcy in the United States Essay

Bankruptcy is a legal declaration of the incapacity of an individual or organization to pay its creditors. Creditors may also file a bankruptcy declaration against a debtor, or known as involuntary bankruptcy to recover a portion of what they are due. However, in majority of bankruptcy petitions, it is the debtor who initiates or declares a voluntary bankruptcy (General Business Provisions, 2008).

The declaration of bankruptcy in the United States is allowed in the Constitution as stated in Article 1, Section 8, Clause 4, which permits the Congress to legislate laws that cover bankruptcies all over the United States. The most recent adaptation of this authority of Congress was the passage of Bankruptcy Reform Act of 1978, codified in Title 11 of the United States Code (Carruthers & Halliday, 1998, p. 49). This provision is most commonly known as the Bankruptcy Code or simply as the Code. It has also been revised numerous times; the newest amendment was in 2005 through the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (US Courts, 2009).

Majority of bankruptcy petitions in the United States are personal or individual bankruptcies that are filed under Chapter 7 or the basic liquidation for individuals and businesses; or

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Chapter 13 or the rehabilitation with a payment plan for individuals with a regular source of income, of the Bankruptcy Code (Carruthers & Halliday, 1998, p. 55). Almost 65% of U.S consumer bankruptcy petitions fall under Chapter 7 (US Courts, 2009). Recently, the major financial crisis that hit the country has led to bankruptcies and closures of large banking and financial institutions (de Burca, 2008).

The collapse of the housing industry in America, as often cited by economists, started the financial crisis of the United States in 2007. It started when the loss of confidence on investments and securities resulted to the collapse of major financial and banking institutions (de Burca, 2008). The peak of the crisis was the downfall of Lehman Brothers Holdings Inc., who held an asset worth $639 billion. Its collapse came a week after the multi-billion dollar rescue of two largest mortgage firms Freddie Mac and Fannie Mae (Greenhouse, 2009).

Numerous companies in the manufacturing and service sectors were also affected by the crisis and resulted to massive lay-offs of workers. According to the U.S Department of Labor (2009), the unemployment rate for February of this year reached 8.1% as compared to the 6.2% that was recorded in September 2008. The Bureau of Labor Statistics (2009) reported the highest rate of layoff of workers for the fourth quarter of 2008, involving 508,859 workers. This statistics represents an increase of 65% from the same period last year.

The financial crisis pose a major threat on the political stability of the country and internationally for it already affects numbers of economies abroad. Workers and citizens are conducting protests in major cities in the country calling for job security, worker’s rights and call for government’s action towards the crisis. Since February 2009, an Economic Intelligence Briefing was adjoined to the everyday briefings arranged for the President (Warrick, 2009). This proves that the crisis is a serious threat to national stability (Greenhouse, 2009).

As of February 2008, the government provided through the Congress a $168 billion package of tax cuts and rebates as part of the economic stimulus. In January 28, 2009, President Barack Obama signed an $819 billion stimulus plan which is part of the recovery package by his administration (Washington Post, 2009). These fiscal policies from the government aim to cushion the effect of the financial crisis on the U.S economy.


Carruthers, Bruce G. & Halliday, Terrence, C. (1998). Rescuing Business: The Making of Corporate Bankruptcy Law in England and the United States. Oxford: Oxford University.

de Burca, D. (2008, September 16). Panic Monday; World’s Biggest Financial Crisis in Almost 80 Years Thousands of Workers to Lose Their Jobs Shares Plummet after US Bank Goes Bust in Black Day. The Mirror (London).

General Business Provisions. (2008). Journal of Accountancy, 206(2).

Greenhouse, S. (2009, February, 13). Record High Mass Layoffs. Economix. Retrieved March 25, 2009, from http://economix.blogs.nytimes.com/2009/02/13/record-high-mass-layoffs/

United States Department of Labor. (n.d). Economy at a Glance. Bureau of Labor Statistics. Retrieved March 25, 2009, from http://www.bls.gov/eag/eag.us.htm

US Courts. (2009). Bankruptcy Statistics. Retrieved March 25, 2009, from http://www.uscourts.gov/bnkrpctystats/bankruptcystatscharts.htm

Warrick, J. (2009, February 26). White House Given First Daily Briefing. Washington Post. Retrieved March 25, 2009, from http://www.washingtonpost.com/wp-dyn/content/article/2009/02/25/AR2009022503389.html

Washington Post. (2009, March 25). Economic Stimulus. Retrieved March 25, 2009, from http://topics.nytimes.com/topics/reference/timestopics/subjects/u/united_states_economy/economic_stimulus/index.html

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