Bankruptcy Primer

February 2, 2011

Bankruptcy

• Legally declared inability to pay debts

• Began in England in approximately 1542

– Debtors were allowed to lose money owed

– Also lost their freedom!

• Bankruptcy first seen in US in 1789

• Bankruptcy Reform Act of 1978 overhauled Bankruptcy law

– Bankruptcy Code

Chapter 7 bankruptcy

• Chapter 7 governs liquidation of property

• 2005 changes

– Added significant additions• Ruled that a person must prove their current income

• Too much income could be grounds for abuse

• New rules also aimed to make it harder to file in a different

state

– Also changed the types of assets that could be used when filing

Chapter 11 bankruptcy

• Can be claimed by people, organizations, or

businesses

– Has no limit on amount of debt that may be claimed

– Often used by businesses that look to restructure

their debt

– Very flexible

– Quite expensive

Chapter 13 bankruptcy

• Debtor is protected against action

• Includes a debt management plan (DMP)

• Creditors MUST accept arrangements of DMP

• Good for

– Overdue house payments

– Back child support

• Upper limit for filing

Bankruptcy benefits

• Liquidation of many debts owed• Property may not be repossessed• Collection attempts stop• Utilities not turned off• No wage garnishment• No foreclosure• Allows disputes of false claims

Bankruptcy drawbacks

• Stigma from acquaintances

• Repeated debts, or ripple effect

• Potential jail time

• Affects credit report for extended period of

time

Bankruptcy in a partnership

• Partner in debt may leave the partnership

• Also can stay but is responsible for any

personal and business debts

– Debtor will have debts liquidated

– Remaining partners still owe any of their share

• Problems may arise from worried vendors

Specific suggestions

• This person should file bankruptcy

– Size of debt

– Amount owed creditors

• Needs to get counseling to avoid future debt

• Allows him to keep the company

• Restructures the debt to payback creditors

References

• Silverman, J. (2011) How Bankruptcy Works. http://money.howstuffworks.com/personal-finance/debt-management/bankruptcy2.htm. Last accessed February 2, 2011.

• U.S. Courts Bankruptcy Statistics, Fiscal Year 2008.