Today section 2-718(1) of the Uniform Commercial Code deals with the difference between a valid liquidated damages clause and an invalid penalty clause.
Liquidated damages clauses possess several contractual advantages.
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Upon the successful completion of bankruptcy proceedings, the debtor is relieved of the debt obligations incurred prior to filing for bankruptcy.
Bankruptcy filings in the United States fall under one of several chapters of the Bankruptcy Code: Chapter 7, which involves liquidation of assets; Chapter 11, which deals with company or individual reorganizations; and Chapter 13, which is debt repayment with lowered debt covenants or payment plans.
These damages are determined when a contract is drawn up, and serve as protection for both parties that have entered the contract, whether they are a buyer and a seller, an employer and an employee or other similar parties.
The principle of requiring payments to represent damages rather than penalties goes back to the Equity courts, where its purpose was to protect parties from making Unconscionable bargains or overreaching their boundaries.
The bankruptcy process begins with a petition filed by the debtor, which is most common, or on behalf of creditors, which is less common.
All of the debtor's assets are measured and evaluated, and the assets may be used to repay a portion of outstanding debt.
Bankruptcy offers an individual or business a chance to start fresh by forgiving debts that simply cannot be paid, while offering creditors a chance to obtain some measure of repayment based on the individual's or business' assets available for liquidation.
In theory, the ability to file for bankruptcy can benefit an overall economy by giving persons and businesses a second chance to gain access to consumer credit and by providing creditors with a measure of debt repayment.
The chapter allows individuals to dispose of their unsecured debts, such as credit cards and medical bills.
Individuals with nonexempt assets, such as family heirlooms; collections with high valuations, such as coin or stamp collections; second homes and vehicles; and cash, stocks or bonds, must liquidate the property to repay some or all of their unsecured debts.
Notwithstanding the substantial logic and appeal of this argument, the court dismissed it almost out of hand by using a form of "boot-strap" argument--despite what appears to be contrary conduct, the owner cannot be said to be "estopped" from making this argument because (1) caselaw permits owners to claim Liquidated damages: the forgotten remedy in noncompete disputes: damages are often difficult to prove in unfair competition cases.