LESSON 9-2 BANKRUPTCY CHOICES Learning Goals: - Explain the reasons for and purposes of bankruptcy and list strategies for avoiding bankruptcy. - Describe the different types of bankruptcy.
BANKRUPTCY Bankruptcy is a legal procedure to relieve a person of excessive debt. Bankruptcy is granted by a federal court. Voluntary Bankruptcy – the individual asks the court to declare bankruptcy. Involuntary bankruptcy – creditors petition the court to force a debtor into bankruptcy. Bankruptcy should be avoided if at all possible, but there are cases where bankruptcy is the only practical choice, for example, having a major illness. Common reasons for bankruptcy Excessive medical bills Small business failure (half of all small businesses fail each year) Overspending and unwise use of credit Losing employment and being overextended Having no savings or emergency fund to access when unexpected events (losses) occur.
PURPOSES OF BANKRUPTCY Two purposes for Bankruptcy 1) Give the debtor a fresh start. 2) Ensure fair treatment for creditors
AVOIDING BANKRUPTCY Credit Counseling is a service to help consumers manage credit and avoid bankruptcy Counselors wok with debtors to give advice, set up a budget, and arrange a payment plan for debts. Debt Management service works with you and your creditors to create a workable plan for paying off debt. Debt Consolidation is the process of getting one loan with a single monthly payment to pay off all of your debts. An equity loan is a second mortgage or debt secured with the equity in your home.
TYPES OF BANKRUPTCY Chapter 7 Bankruptcy Chapter 11 Bankruptcy Chapter 13 Bankruptcy
CHAPTER 7 BANKRUPTCY Also known as straight bankruptcy or liquidation bankruptcy. Involves the forfeiture of an individual’s assets in exchange for the discharge of debts. A discharge is a court order the pardons the debtor from having to pay debts. The debtor assets are sold and the money is used to repay as much of the debt as possible. Then the remaining debt is discharged. Some debts can not be discharged. These include: Tax debt, student loans, government fines, child support, spousal support Some property is exempt from having to be forfeited and sold to pay off debtors. Examples: Homestead - $21,625, Household goods $11,525, Automobile - $3,450, Tools of trade, books, equipment - $2,175
CHAPTER 11 BANKRUPTCY For Business Owners, reorganization of debt as decided by the court so that a business can remain viable. Allows business to retain possession of its assets and remain in operation after a plan for reorganization is filed and approved by the court. The purpose of Chapter 11 Bankruptcy is to make sure that the business can in fact be viable after the bankruptcy proceeding.
CHAPTER 13 BANKRUPTCY Also known as individual debt adjustment It is a repayment plan for individuals for some of their debt. It is designed for debtors who have a good source of steady income. It is used mostly by homeowners and working people. Rather than liquidate assets, debtors follow a court- approved plan to pay back as much debt as they can over a three to five year period. After that time, the remaining balances on debts are discharged it all the payments in the plan were made. Chapter 13 forces creditors to stop interest and late penalties.
THE BANKRUPTCY ABUSE PREVENTION AND CONSUMER PROTECTION ACT OF 2005 Made it difficult for consumers to erase all debt by requiring more people to file Chapter 13 instead of Chapter 7 Bankruptcy. Law is designed to crack down on debtors who use bankruptcy laws to run up and then avoid debts.
BANKRUPTCY FRAUD Bankruptcy fraud is the abuse of bankruptcy laws in a way that favors the debtor and defrauds creditors. Bankruptcy fraud is a federal crime. Must reveal all assets, not hide them from the bankruptcy court. Assets must be disclosed so that creditors can receive a fair share of the debt repaid. Creating debt with the intent of denying creditors payment for goods and services is also illegal and unethical.
ASSIGNMENT Pg. 296 – problems 1-13, 20