Bankruptcy Economics Ms. McRoy. “Aim”  What are the effects of filing for bankruptcy?

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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 some or all of the assets of a debtor are distributed among creditors because the debtor is not able to pay his/her debts.  Debtor – the borrower  Creditor – the lender Note: it may also include a plan for the debtor to repay creditors on an installment basis.

Types of Bankruptcy Chapter 7  aka “a straight bankruptcy” or “liquidation bankruptcy”  The debtor (person or business) must submit a petition to a U.S. district court  Many, but not all, debts are forgiven  Most of the debtor’s assets are sold to pay off creditors  Certain assets receive protection: Social Security payments, unemployment compensation  The release from debt does not forgive: alimony payments, child support payments, certain taxes, fines, certain debts arising from educational loans

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 (e.g. sole proprietorships, partnerships and corporations)  Permits reorganization  Similar to a Chapter 13 filing for individuals, where arrangements are made for re-payment.  The trustee to operate the debtor's business. 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.  It is applicable only to family farmers and fishermen.

Historical Bankruptcy Filings Total Bankruptcy Filings by Bankruptcy Chapter Years Ended March 31, Chapter Year ,75711, , ,118, 48113, , ,100,03215, , ,30411, , ,0156, ,551 Source:

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?