( Originally Published 1918 )
Insolvency and Bankruptcy are not the same thing. A man or a business may be insolvent and yet go on if current bills or accounts are paid; and no creditor can bring suit. But bankruptcy means that a man or a business has by a court been adjudged bankrupt and put in the hands of a trustee, for the benefit of creditors. All bankrupts are insolvent, but all insolvents are not bankrupt.
The National Bankruptcy Law, approved July 1, 1898, provides for a complete system of bankruptcy, to be uniform throughout the United States and administered by the United States courts.
Voluntary Bankruptcy.—Any person who owes debts, except a corporation, shall be entitled to the benefit of this act as a voluntary bankrupt.
Involuntary Bankrupts.—Any natural person (except a wage earner or a person engaged chiefly in farming or the tillage of the soil), any unincorporated company, and any corporation en-gaged principally in manufacturing, trading, printing, publishing, or mercantile pursuits, owing debts to the amount of one thousand dollars or over, may be adjudged an involuntary bankrupt upon default or an impartial trial, and shall be subject to the provisions and entitled to the benefits of this act. Private bankers, but not national banks or banks incorporated under state or territorial laws, may be adjudged involuntary bankrupts.
Acts of Bankruptcy.—The National Bankrupt Law defines an act of bankruptcy by a person to consist of his having conveyed, transferred, concealed, or removed, any part of his property, with intent to hinder, delay, or defraud his creditors,. or any of them; or transferred, while insolvent,. any portion of his property to one or more of his creditors, with intent to prefer such creditors over his other creditors; or suffered or permitted, while insolvent, any creditor to obtain a preference through legal proceedings and not having at least five days before a sale or final disposition of any property affected by such preference, vacated or discharged such preference; or made a general assignment for the benefit of his creditors; or, being insolvent, applied for a receiver or trustee for his property, or because of insolvency a receiver or trustee has been put in charge of his property under the laws of a state, of a territory, or of the United States; or admitted in writing his inability to pay his debts and his willingness to be adjudged a bankrupt on that ground.
Proceedings.--A bankrupt may of his own motion offer to surrender his property to the ad-ministration of the United States court and ask for his discharge in voluntary bankruptcy, or creditors may apply to the courts to compel a bankrupt to turn over his property to be administered under the act for the benefit of the creditors. A petition may be filed against a person who is insolvent and who has committed an act of bankruptcy, within four months after the commission of such act. Such time shall not expire until four months after the date of recording or registering of the transfer or assignment, when the act consists in having made a transfer of any of his property with intent to hinder, delay or de-fraud his creditors or for the purpose of giving a preference or a general assignment for the benefit of creditors, if by law such recording or registering is required or permitted; or if it is not, from the date when the beneficiary takes notorious, exclusive or continuous possession of the property, unless the petitioning creditors have received actual notice of such transfer or assignment.
The Proceedings Once Inaugurated and the adjudication in bankruptcy having been made, the court proceeds to take charge of the bankrupt's property, and administer the same for the benefit of the creditors, and determine all questions which may arise in regard to the right of the bankrupt or the creditors, either as against the bankrupt or as between themselves in accordance with the above-prescribed powers. A trustee is appointed, either selected by the creditors at a meeting called for that purpose or, in case they fail to select a trustee, one is appointed by the Court. His duty is to collect the property, realize on the same in such manner as may be for the best interests of all concerned, and ultimately distribute the same among the creditors in such proportions as they may be adjudicated to be entitled thereto.
Referees: As all questions, both of law and fact, in relation to the property or the rights of the various parties must be decided in the bankruptcy proceeding, it is provided that referees be appointed, who are charged with the duty of hearing the allegations and testimony of all parties and deciding all such questions that may arise. Each case, as it comes up, is assigned to some referee, whose duty it is to adjudicate and pass upon all such questions arising therein in the first instance, the right being reserved to any parties to appeal from the decision of the referee to the United States District Court.
The Duties of the Referee are substantially of a judicial character, and he occupies much the same position as a judge or primary resort, subject to an appeal to the Court, and is required to take the same oath of office as that prescribed for judges of the United States courts. By Section 38 of the act, the referee is invested with jurisdiction to consider all petitions referred to him by the clerks, make adjudications or dismiss the petition; exercise the powers vested in courts of bankruptcy for the administering of oaths to and the examination of witnesses, and for requiring the production of documents in proceedings before him, except the power of commitment, and, in the absence of the Judge, to exercise all his powers for taking possession and releasing the property of a bankrupt, and to perform such part of the duties of the courts of bankruptcy as they may prescribe by rules and orders, excepting only questions arising on applications of bankrupts for compositions or discharges.
All questions in regard to the property or assets or rights of the creditors and persons interested come before the referee for hearing and de-termination, subject to the right of appeal. After the rights of all parties have been ascertained and determined, and the property has been realized upon, it is distributed among the creditors.
Notice to Creditors.—Detailed provisions are made in the act for giving notice to all creditors and other persons interested in the estate of the pendency of the proceedings, the payment and declaration of dividends and other matters, and providing methods whereby all parties interested may be heard on all subjects arising in the course of the proceedings.
Compromises.—Provision is made in the act for allowing bankrupts to compromise or settle with their creditors by a proceeding known as composition proceedings, whereby if a bankrupt and a majority in number and amount of his creditors agree upon some basis of settlement, the same, if approved by the Court, shall become binding upon all creditors. The decision of the question as to the approval of compositions and granting discharges to a bankrupt from his debts is specific-ally reserved by the act to the judges of the United States courts; but the Court, by virtue of its general powers, may refer such matters to the referee to take testimony and report to the Court his opinion thereon.
Defense.—It is made a complete defense to any proceedings in bankruptcy to allege and prove that the party proceeded against was not insolvent at the time of the filing of the petition against him.
Duties of Bankrupts.—The bankrupt shall (1) attend the first meeting of his creditors, if directed by the court or a judge thereof to do so, and the hearing upon his application for a discharge, if filed; (2) comply with all lawful orders of the court; (3) examine the correctness of all proofs of claims filed against his estate; (4) execute and deliver such papers as shall be ordered by the court; (5) execute to his trustee transfers of all his property in foreign countries ; (6) immediately inform his trustee of any attempt, by his creditors or other persons, to evade the provisions of this act, coming to his knowledge; (7) in case of any person having to his knowledge proved a false claim against his estate, disclose that fact immediately to his trustee; (8) prepare, make oath to, and file in court within ten days, unless further time is granted, after the adjudication if an involuntary bankrupt, and with the petition if a voluntary bankrupt, a schedule of his property, showing the amount and kind of property, the location thereof, its money value in detail, and a list of his creditors, showing their residences, if known (if unknown that fact to be stated), the amount due each of them, the consideration thereof, the security held by them, if any, and a claim for such exemptions as he may be entitled to, all in triplicate, one copy of each for the clerk, one for the referee, and one for the trustee ; and (9) when present at the first meeting of his creditors, and at such other times as the court shall order, submit to an examination concerning the conducting of his business, the cause of his bankruptcy, his dealings with his creditors and other persons, the amount, kind, and whereabouts of his property, and, in addition, all matters which may affect the administration and settlement of his estate; but no testimony given by him shall be offered in evidence against him in any criminal proceedings.
Provided, however, that he shall not be required to attend a meeting of his creditors, or at or for an examination at a place more than one hundred and fifty miles distant from his home or principal place of business, or to examine claims except when presented to him, unless ordered by the court, or a judge thereof, for cause shown, and the bankrupt shall be paid his actual expenses from the estate when examined or required to at-tend at any place other than the city, town, or village of his residence.
Costs.—The aim of the act has been to make the expense of the proceedings depend largely upon the amount of the property involved, and the compensation of the referees is fixed substantially at 1 per cent on the amount distributed to the creditors in ordinary cases, where the assets are distributed by the Court, and one-half of 1 per cent in composition cases, and the trustees who have charge of the actual management of the bankrupt's property receive as compensation such commissions on amounts paid out by them as dividends as the court may allow, not to exceed, however, six per cent on the first $500 or up; four per cent up to $1,500, above $1,500 to $10,000 two per cent, and one per cent on all sums in excess of $10,000.
Discharge of Debtor.--Any person may, after the expiration of one month and within the next twelve months subsequent to being adjudged a bankrupt, file an application for a discharge, or if it shall be made to appear that the bankrupt was unavoidably prevented from filing such application within said time, it may be filed within the next six months. The judge shall hear the application for discharge, and all such pleas and proofs as may be made in opposition thereto. Applicants are to be discharged unless they have committed offenses punishable by imprisonment, as provided in the act, or with intent to conceal their 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, or permitted to be removed, destroyed or concealed any of his property with intent to hinder, delay or defraud his creditors; or in voluntary proceedings, has been granted a discharge in bankruptcy within six years; or in the course of the proceedings in bankruptcy refused to obey any lawful order of or to answer any material question approved by the Court.
The confirmation of a composition shall discharge the bankrupt from his debts, other than those agreed to be paid by the terms of the composition, and those not affected by a discharge.
Discharges may be revoked on the ground of fraud.
Liability of Co-Debtor or Surety.—The liability of a person who is a co-debtor with, or guarantor, or in any manner a surety for a bankrupt, shall not be altered by the discharge of such bankrupt.
Effect of Discharge.—A discharge in bankruptcy shall release a bankrupt from all his provable debts, except such as are due as a tax levied by the United States, the state, county, district, or municipality in which he resides; liabilities for obtaining property by false pretenses or false representations, or for willful and malicious injuries to the person or property of another, alimony, seduction, criminal conversation; debts which have not been duly scheduled in time for proof and allowance, with the name of the creditor, if known to the bankrupt, unless such creditor had notice or actual knowledge of the proceedings in bankruptcy; or debts which were created by his fraud, embezzlement, misappropriation„ or defalcation, while acting as an officer or in any fiduciary relation or capacity.