PETITIONS IN BANKRUPTCY.—Suppose a debtor wishes to become bankrupt himself. He files a petition in the United States District Court, which is the court of bankruptcy jurisdiction, and is immediately adjudicated a bankrupt. If his creditors want to make him a bankrupt it is necessary that three of them, having claims amounting to not less than $500 in the aggregate, should join, unless there are less than twelve creditors in all. In that event one creditor only may petition. This petition must set forth (1) the creditors' claims, (2) the fact that the debtor has committed an act of bankruptcy, and (3) the fact that he owes debts aggregating $1,000 or more. However slight his indebtedness, if he cannot pay it, a man may be a voluntary bankrupt, but he must owe at least $1,000 to be liable to involuntary proceedings.
ACTS OF BANKRUPTCY—FRAUDULENT CONVEYANCES.—Now what are the acts of bankruptcy which render a debtor liable to a petition by his creditors? In the first place a fraudulent conveyance is an act of bankruptcy. Reference to a fraudulent conveyance by general assignment has been made; but there are many kinds of fraudulent conveyances. If a debtor who is insolvent, or who is made insolvent through a gift made by himself, should give away a portion of his property, that would be a fraudulent conveyance, irrespective of the debtor's intent, because the necessary effect of the gift would be to hinder, delay and defraud his creditors. It would be a fraudulent conveyance for a debtor to seek to conceal his property from his creditors by putting it in the hands of some kind friend to hold for him until his creditors should cease to be so troublesome as at the present time. It would be a fraudulent conveyance for a man who is pressed by creditors to turn himself into a corporation for business purposes, and assign all his property to that corporation. This transfer to a corporation, even though done openly, would necessarily hinder and delay his creditors.
PREFERENCES.—As has already been said, paying one creditor to the exclusion of others is not a fraudulent conveyance, but it is a preference, and a preference is a second act of bankruptcy. Either for the debtor to give a preference himself or to allow a creditor to get a preference, by legal proceedings, is an act of bankruptcy. Any transfer made by an insolvent debtor, to pay or to secure in whole or in part a previously existing debt, is a preference.
GENERAL ASSIGNMENTS.—A general assignment, whether fraudulent or not, is an act of bankruptcy. The consequence is, therefore, that if a debtor makes a general assignment, his creditors have the choice of letting it stand and having the estate settled under the general assignment, or of setting it aside and having bankruptcy proceedings.
RECEIVERSHIPS.—Still another act of bankruptcy is the appointment of a receiver on account of insolvency. There, also, the creditors virtually have an option of letting the receivership stand and having the receiver take charge of the distribution of the assets, or of petitioning the debtor into bankruptcy and having the bankruptcy court take charge.
ADMISSION OF INABILITY TO PAY DEBTS.—One further act of bankruptcy is an admission by the debtor of his inability to pay his debts and his willingness to be adjudicated a bankrupt. An act of bankruptcy can form the basis of a petition only within four months after its commission.
INSOLVENT DEBTORS USUALLY COMMIT ACTS OF BANKRUPTCY.—Now an insolvent debtor cannot very well avoid committing one of these acts of bankruptcy. He can avoid making a fraudulent conveyance, but he will find it pretty hard to avoid making a preference. He need not, it is true, pay any of his debts, and it is not a preference to pay money out for present consideration, or to transfer property for present consideration, as to make a mortgage for a new loan; but it will be hard for him to prevent creditors from getting a preference by legal proceedings, at least if the debtor has any assets at all; for if the debtor does not pay any of his creditors, some of his creditors will sue him, get execution, and endeavor to levy it on the debtor's property.
PROCEDURE AFTER ADJUDICATION.—If a debtor has once been adjudicated a bankrupt, it makes no difference whether it was on a voluntary petition or an involuntary petition; the matter goes on in both cases the same way. The first thing, after the adjudication, is, that the referee, a sort of subordinate judge, requires the bankrupt to submit schedules of his assets and of his creditors. The debtor is induced to make these schedules as complete as possible, for the following reasons: if the schedule of assets is knowingly incomplete, the debtor is committing a crime and is likely to be shut up in jail. If the schedule of his creditors is incomplete, any creditor who is left out or whose address is so incorrectly given that the creditor does not get notice of the proceedings in time to prove his claim, is not affected by the discharge; and as the debtor wants a discharge from as many debts as possible, he, of course, will make his schedule of creditors as complete as possible. From this schedule of creditors, the referee sends notices out to all the creditors to meet and choose the trustee. The creditors meet and choose a trustee, who then endeavors to collect the assets of the estate, and under the direction of the court, pays dividends from the assets to the creditors.
PROPERTY WHICH THE TRUSTEE GETS.—The question may be asked: "What property does the trustee get?" He gets all tangible property that the debtor could transfer at the moment of his bankruptcy. He gets intangible property, patents, trademarks, copyrights, seats on the stock exchange, and good-will of a business, with the exception that the debtor still retains the right to carry on his old business himself, in the future, in his own name. The trustee gets rights of action of the bankrupt, except personal rights of action, as they are called. These consist of rights of action for personal injuries, as for assault, or for personal injury by negligence. A right of action for breach of promise of marriage also would not pass to the trustee in bankruptcy. Not only does a trustee get this tangible and intangible property, but he gets also a right to recover any property fraudulently conveyed by the bankrupt, which is not in the hands of a bona fide purchaser, even if the fraudulent conveyance was made years before, provided the statute of limitations has not completely run against it. Any preference, also made within four months before the filing of the petition in bankruptcy, may be recovered from the preferred creditor, if he had reasonable cause to believe, when he received it, that he was getting a preference, but not otherwise. The trustee in bankruptcy gets the debtor's life insurance policies, except in so far as they are made exempt by statute. Life-insurance policies, in favor of a beneficiary other than the insured himself, are exempt, though if the premiums were paid by the debtor while insolvent, the premiums so paid within the past six years may be recovered, and the beneficiary would in effect have to pay those premiums back in order to hold the policy. Even if the policy runs to the insured himself, in his own name, he has the privilege, under the bankruptcy act, to redeem it from the trustee in bankruptcy by paying its cash surrender value. Property acquired by the bankrupt, after the beginning of bankruptcy proceedings, does not pass to the trustee. The bankrupt's property passes free of attachment or judgment liens, secured by creditors within four months prior to the beginning of bankruptcy proceedings. This has no bearing on a case, where, prior to bankruptcy, money has been actually collected by legal proceedings, but only to cases of seizure under legal proceedings which are still pending at the time the petition is filed. If a debtor becomes bankrupt, within four months after his property is attached, the attachment is dissolved. If the debtor does not become bankrupt until after four months, the attachment is a valid lien on the property attached, and so far as the property is sufficient to pay the creditor, he can collect his claim from it, even though the debtor becomes bankrupt before the creditor finally gets judgment and collects his claim.
PROOF OF CLAIMS.—The trustee collects all this property and tries to reduce it to cash, as fast as he can, and while this is going on, creditors will also be proving their claims. It is only claims which exist at the time of filing the petition which are provable, but the debts need not be due at the time of the bankruptcy; it is only essential that they shall be in existence. Interest is added or rebated, as the case may be, to the date of filing the petition. That is, if you have a non-interest-bearing note falling due July 1, and the debtor becomes bankrupt May 1, the face of the note will be proved less a rebate of two months' interest to May 1, because the present value of the note on May 1 is what is provable. On the other hand, if the note had been due on April 1, interest would be added up to the date of filing the petition, and if the note was an interest-bearing note, of course the interest would be provable up to May 1, even if the note did not fall due until July 1 or later. Debts, arising subsequently to the date of filing the petition, must be enforced against the bankrupt's assets acquired after his bankruptcy. Claims for tort are not provable, that is, claims for injuries to person or property not arising out of contact. But a judgment for tort, obtained before the filing of the petition, is provable. There has been a good deal of trouble in regard to what are called contingent claims. The commonest instance is the indorser's liability on a note which is not yet due when the indorser becomes bankrupt. At the time of filing the petition, the indorser's liability is contingent on the possibility that the maker may not pay the note at maturity, and that notice of dishonor will be given to the indorser. Creditors, who have received a preference, cannot prove claims unless they have surrendered, within four months of the bankruptcy, any preference which they have received with reasonable cause to believe that it was a preference. Secured creditors can realize on their security and then prove for the balance of their claims. A few claims are given priority over others and paid in full before any dividend to other creditors. The most important claims of this sort are the wages of workmen, clerks or servants earned within three months of the bankruptcy and not exceeding the sum of $300.