Chapter 12.2: Bankruptcy

Bankruptcy Sometimes people and businesses through no fault of their own accumulate so much debt, they can no longer afford to repay it. Businesses: suffer from bad economy Individual: credit debt, illness, loss of job

Old English law Debtors who couldn’t repay their debt would be put in debtor’s prison The drafters of the US Constitution opposed this treatment and gave congress authority to help people

Bankruptcy Legal process by which a debtor can make a fresh start through the sale of assets to pay off creditors. Certain bankruptcies allow debtor to stay in business and use the revenue collected to pay his or her debt. Another purpose is to become free from debt Stays on credit report for up to 10 years!

Avoiding Bankruptcy Having trouble paying bills? STOP USING CREDIT CARD! You can contact your creditor and work out an adjusted repayment plan. You can also get a consolidated loan Combines all your debt into one loan with lower payments Credit cards, car payments, student loans etc.

Filing for Bankruptcy File a petition Automatic stay is in effect Postponement of collection proceedings against the debtor Creditor must stop contact with debtor Creditors cannot sue at this point Debit/credit cards can no longer be used once a petition has been filed. Bankruptcy law is FEDERAL statutory Consumer Credit Counseling Service Offers confidential debt-counseling services.

Types of Bankruptcy Voluntary Involuntary Debtor chooses to file Creditors begin proceedings instead of debtor 3 creditors must file if debtor has 12 or more creditors Debt owed must exceed $11,625 Single creditor can file if owed more than $11,625

Chapter 7 Liquidation Debtors must do the following: Allows debtors to discharge all their debts Debtor must sell most of their property and pay their creditors from the proceeds. Debtors must do the following: Get credit counseling Family income must be below the state’s average family income If income is large than state average– they would file chapter 13 Provide tax return from most recent year Complete course in financial management Fresh start policy= some assets can be kept

Chapter 11 Reorganization Allows businesses to reorganize their financial affairs and still remain in business Business needs to file a petition and then a reorganization plan is made If plan is approved, then it will go into operation If plan is successful, the business will continue. If not, it will be forced to close

Chapter 12 Bankruptcy that lets family farmers, and fishing businesses create a plan for repayment that allows them to keep their operations running.

Chapter 13 Bankruptcy that permits individual debtors to reorganize their debts and develop repayment plan 3-5 year repayment plan Debtors wishing to keep their cars must pay full loan amount for their car These items are called exemptions

CANNOT BE DISCHARGED Debt due to fraud Back taxes Student loans

Debtor’s Estate Trustee is appointed to sell the debtor property, or estate to obtain cash. The trustee distributes cash among the debtor’s creditors according to a priority list

Restoring Credit Remains on credit report for 10 years Reduces line of credit Bankruptcy gives people a chance to start fresh Debt becomes discharged which actually reduces debt to income ratio Time allows credit to be restored