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 Bankruptcy1) 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