The purpose of bankruptcy law is to ensure that creditors may receive some compensation for the loss of funds they lent to a bankrupt person. This bankrupt person, the debtor, is legally no longer able to repay borrowed funds. Bankruptcy laws vary from country to country, depending how the nation wants to deal with legally insolvent citizens.
Canada bankruptcy law is mainly defined by the Bankruptcy and Insolvency Act (1985). This law governs anyone who lives or has business in Canada. The act is invoked to begin the bankruptcy proceedings when either:
- The insolvent person voluntarily declares bankruptcy
- By the debtor's creditors, when the debtor owes at least $1000 CAD
- Or when a proposal under the Act has failed
At this point, the insolvent person is brought to bankruptcy court, where their estate is divided in order of the priority of claims (usually in order of who the bankrupt person owed the most money to). A trustee is assigned by the Superintendent of Bankruptcy to administer the parts of the insolvent person's estate to its respective owners. An inspector, if not multiple inspectors, will be assigned to evaluate and investigate the value of the estate to ensure that nothing is missed.
In the United States, bankruptcy is governed under Article 1, Section 8, Clause 4 of the United States Constitution and the Bankruptcy Reform Act of 1978. Although bankruptcy is filed under federal law, and federal law governs bankruptcy proceedings, state laws are applied for determining property rights. Besides this, filing for bankruptcy and bankruptcy proceedings are very similar to those in Canada; the debtor's estate is divided and a trustee is appointed to administer it.