The American-style restart: A look at US bankruptcy law
While in Germany the word “insolvency” is often associated with definitive failure, American law offers a different, often surprising option: a “fresh start.” The US insolvency system is used far more frequently than its German counterpart and is available not only to companies but also to private individuals. But how exactly does it work?
A second chance system
The statistics speak for themselves: in 2000, one in every 215 people in the US filed for bankruptcy, compared to only one in every 2,050 in Germany. Among other things, this huge discrepancy is due to the peculiarities of US law, which allows consumer bankruptcy as a way of clearing debts and making a fresh start in one’s career.
The core of American bankruptcy law is the Bankruptcy Code. It essentially distinguishes between two types of bankruptcy: liquidation (dissolution of assets) and reorganization (restructuring).
The main types of bankruptcy
The Bankruptcy Code breaks down the different procedures into so-called chapters:
- Chapter 7 – Liquidation: This procedure results in the complete liquidation of the debtor’s assets in order to satisfy creditors as best as possible. In the case of private individuals, only the existing assets – and not the monthly disposable income – are used to pay off the debts. As a rule, the remaining debts are discharged after just a few weeks. Another advantage is that such proceedings can be initiated again after six years.
- Chapter 11 – Reorganization (corporate restructuring): In this case, debtors retain control of their companies in order to restructure them. They draw up a restructuring plan that specifies how assets are to be distributed among creditors. A well-known example of restructuring under Chapter 11 was the case of Kmart.
- Chapter 13 – Reorganization (consumer relief): This procedure applies to private individuals. Under the supervision of a trustee, the debtor must adhere to a payment plan approved by the court, which runs for at least three years and also takes into account the debtor’s disposable income. Once the plan has been successfully executed, the remaining debts are discharged.
German and US insolvency law differ in a number of key respects.
Fresh Start vs. “Restschuldbefreiung” (Residual Debt Discharge)
One key difference is the underlying philosophy. While the USA focuses on a fresh start, Germany focuses on the discharge of residual debt. US bankruptcy law is more geared towards a fresh start, which is particularly evident when looking at the duration of the proceedings. In the USA, the discharge of residual debt can be achieved in just a few weeks under certain circumstances.
By contrast, the German procedure takes considerably longer. As a rule, insolvency proceedings initiated after October 1, 2020, take three years. Before that, the proceedings could even take up to six years.
Different types of procedures
There are differences in the insolvency procedures in both countries.
US law divides proceedings into clearly defined, separate “chapters”:
- Chapter 7 (liquidation): The focus lies on the liquidation of the debtor’s assets.
- Chapter 11 (reorganization): This procedure is used for the reorganization of companies, often with the management remaining in office (debtor in possession).
- Chapter 13 (consumer relief): A special procedure for private individuals who have a regular income.
Germany:
- A primary distinction is made between regular insolvency for companies and self-employed persons and consumer insolvency for private individuals.
- In Germany, too, reorganization is a goal that is often pursued within the framework of self-administration—a concept similar to Chapter 11 in the US.
Assets included in the insolvency estate
There are also notable differences in the way assets are treated.
USA: The insolvency estate generally comprises the debtor’s worldwide assets. There are generous exemptions, however, which vary from state to state. So-called “homestead exemptions” allow debtors to keep their homes, sometimes even without restrictions on value.
Germany: The insolvency estate also includes all seizable assets. However, unlike in the US, there are no exceptions for owner-occupied homes in Germany. In principle, only non-seizable portions of income and certain non-seizable items are excluded.
Protection against enforcement
There is another important difference as regards the protection against creditors.
- USA: The automatic stay is a very powerful instrument. When an insolvency petition is filed, almost all creditor actions, such as lawsuits or seizures, are stopped immediately.
- Germany: A comparable form of protection only comes into effect once insolvency proceedings have been initiated. Creditors are no longer allowed to enforce their claims individually, but must register them with the insolvency administrator. However, this protection is not as far-reaching as the “automatic stay” in the US.
The role insolvency plays in society
Statistics show that there are significantly more bankruptcies per capita in the US than in Germany. This can probably also be attributed to the differences mentioned above: the US fresh start model makes bankruptcy less stigmatizing, and the fact that procedures are often easier to handle.
This insight illustrates how American law differs from German law and why accurate translation of legal and financial terms is crucial. As a translator specializing in law, business, and finance, I ensure that the nuances and intended legal effects of such concepts are accurately conveyed in the target language
