FAQ / What objectives and/or philosophies underlie the various United States insolvency laws?

In general terms, the primary objective of the Bankruptcy Code (at least as it relates to commercial business cases) is to establish a procedural framework for reorganizing or liquidating a business. However, there are at least two basic philosophies that underlie several of the Bankruptcy Code’s provisions. The first is the principle of equitable distribution, requiring the fair and equal treatment of all creditors and equity holders of the same class. The second reflects a preference in favor of reorganizations such that debtors with viable businesses that have value as going concerns are given an opportunity to restructure their debts in order to continue in business with a fresh start.

These philosophies are in marked contrast to the general objectives of various non-bankruptcy debtor/creditor laws which often operate only to protect the rights and interests of a debtor’s creditors. Under the Bankruptcy Code, the rights or claims of most creditors under non-bankruptcy debtor/creditor laws are temporarily suspended, may be modified and, in appropriate circumstances, partially or wholly discharged.

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