Legal Definitions - act of bankruptcy

An act of bankruptcy refers to a specific action or event undertaken by a debtor that, under older legal frameworks, would have allowed creditors to initiate an involuntary bankruptcy proceeding against them. These actions typically indicated the debtor's inability to pay their debts or an attempt to unfairly manage their assets to the detriment of creditors. While this concept was a crucial requirement for involuntary bankruptcy in the United States prior to the Bankruptcy Reform Act of 1978, it is no longer a prerequisite under current U.S. federal bankruptcy law. However, understanding this historical term helps in interpreting older legal texts and cases, and similar concepts may exist in other jurisdictions.

Here are some examples illustrating what would have been considered an act of bankruptcy:

• Imagine a small business owner, facing mounting debts, secretly transfers ownership of their most valuable delivery truck to a distant relative for a token sum, just as creditors are preparing to demand payment. This action, designed to put the asset out of reach of creditors, would have been considered an act of bankruptcy. It demonstrates an attempt to unfairly dispose of property to avoid paying legitimate debts.

• Consider a person deeply in debt who, knowing they are about to become completely insolvent, pays off a loan from a close friend in full, while leaving all other creditors (like banks and suppliers) unpaid. This preferential payment to one creditor over others, especially when the debtor is unable to pay everyone, would have historically been deemed an act of bankruptcy. It unfairly disadvantages other creditors who have an equal right to a share of the debtor's limited assets.

• Suppose a company, struggling financially, issues a public statement declaring that it is unable to meet its financial obligations and will cease operations immediately. Such a public admission of insolvency, indicating a clear inability to pay debts as they become due, would have been considered an act of bankruptcy. This declaration would have provided grounds for creditors to seek an involuntary bankruptcy to ensure an orderly and fair distribution of the company's remaining assets.