Bankruptcy Economics Ms. McRoy.

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Presentation transcript:

Bankruptcy Economics Ms. McRoy

“Aim” What are the effects of filing for bankruptcy?

Bankruptcy What is it? A legal process in which the debtor petitions the courts to obtain relief from debt This is accomplished either through a discharge of the debt or through a restructuring of the debt Debtor – the borrower Creditor – the lender

Types of Bankruptcy Chapter 7 aka “a straight bankruptcy” or “liquidation bankruptcy” Typically most of the debtor’s assets are sold to pay off creditors Many, but not all, debts are forgiven The release from debt does not forgive: certain debts arising from educational loans certain taxes/fines alimony payments child support payments Certain assets receive protection: Social Security payments Unemployment compensation

Types of Bankruptcy (cont’d) Chapter 13 aka “a wage-earner plan bankruptcy” A debtor (i.e. individual) with a regular income proposes a plan to the court for using future earnings or assets to eliminate his/her debts over a specified period of time. The debtor normally keeps all or most of his/her property. Payments are made to a Chapter 13 trustee.

Types of Bankruptcy (cont’d) Chapter 11 Available to all businesses Permits reorganization Similar to a Chapter 13 filing for individuals, where arrangements are made for re-payment. In Chapter 11, unless a separate trustee is appointed for cause, the debtor, as debtor in possession, acts as trustee of the business.

Types of Bankruptcy (cont’d) Chapter 12 Similar to Chapter 13 in structure, but it offers additional benefits to farmers and fishermen in certain circumstances, beyond those available to ordinary wage earners.

Historical Bankruptcy Filings Total Bankruptcy Filings by Bankruptcy Chapter Years Ended March 31, 2008-2012 Chapter Year 7 11 12 13 2012 958,757 11,339 606 396,175 2011 1,118, 481 13,051 743 438,788 2010 1,100,032 15,251 605 415,966 2009 819,304 11,774 367 370,836 2008 560,015 6,971 343 334,551 Source: http://www.uscourts.gov/News/NewsView/12-05-09/Bankruptcy_Filings_Down_13_Percent_for_March.aspx

Effects of Bankruptcy Easier to obtain credit if file for Chapter 13 versus Chapter 7. Bankruptcy reports are kept on file with credit agencies for 7-10 years.

“Aim” What are the effects of filing for bankruptcy?