Distinguish between an assignment in bankruptcy and a bankruptcy order. Explain the process involved in each case.

Distinguish between an assignment in bankruptcy and a bankruptcy order. Explain the process involved in each case.

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October 28, 2023
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Distinguish between an assignment in bankruptcy and a bankruptcy order. Explain the process involved in each case.

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1. Assignment in Bankruptcy:

An assignment in bankruptcy is a voluntary act initiated by the debtor facing financial difficulties. It involves the debtor voluntarily assigning their property, assets, and rights to a trustee in bankruptcy, with the intention of using these assets to satisfy their debts. The debtor essentially surrenders their financial affairs to the trustee for the benefit of creditors.

Process of an Assignment in Bankruptcy:

  1. Debtor's Decision: The debtor, realizing their financial distress, decides to make an assignment in bankruptcy. This is typically done when the debtor acknowledges their inability to manage their debts and seeks a formal legal process to address their financial situation.
  2. Appointment of a Trustee: The debtor appoints a licensed insolvency trustee, also known as a bankruptcy trustee, to act as the trustee in bankruptcy. This trustee is a licensed professional responsible for administering the bankruptcy estate.
  3. Transfer of Assets: The debtor voluntarily transfers ownership and control of their assets, including cash, real estate, personal property, and other holdings, to the trustee. The trustee then takes control of these assets and administers them on behalf of the creditors.
  4. Protection from Creditors: Once the assignment is made, the debtor is typically protected from legal actions by their creditors. This protection is often referred to as a "stay of proceedings."
  5. Asset Liquidation and Distribution: The trustee's role is to liquidate the assets and distribute the proceeds among the creditors according to the priorities established by bankruptcy laws. Secured creditors are typically paid first, followed by unsecured creditors.

2. Bankruptcy Order:

A bankruptcy order is an involuntary legal process initiated by a creditor or a debtor (in some jurisdictions) to declare the debtor bankrupt when they have failed to meet their financial obligations and are unable to address their financial distress voluntarily.

Process of a Bankruptcy Order:

  1. Creditor's Petition or Debtor's Petition: In the case of a creditor's petition, a creditor who is owed money by the debtor files a formal petition with the court to declare the debtor bankrupt. In the case of a debtor's petition, the debtor voluntarily petitions the court for their bankruptcy.
  2. Court Proceedings: The court reviews the petition, and if it is satisfied that the debtor is insolvent and meets the legal criteria for bankruptcy, it may issue a bankruptcy order. This order declares the debtor bankrupt and initiates the bankruptcy process.
  3. Appointment of a Trustee: Similar to an assignment in bankruptcy, a licensed insolvency trustee is appointed to administer the bankruptcy estate.
  4. Protection from Creditors: Once the bankruptcy order is issued, the debtor is protected from legal actions by their creditors. This protection is often referred to as an "automatic stay."
  5. Asset Liquidation and Distribution: The trustee takes control of the debtor's assets, liquidates them, and distributes the proceeds among the creditors according to the established priorities under bankruptcy laws.

In both cases, the ultimate goal is to fairly distribute the debtor's assets among creditors and provide the debtor with a fresh financial start. The main difference lies in the initiation of the process – assignment in bankruptcy is voluntary, initiated by the debtor, while a bankruptcy order is involuntary, initiated by a creditor or the debtor, with court approval.

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