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. finance/debt-management/bankruptcy2.htm. Last accessed February 2, U.S. Courts Bankruptcy Statistics, Fiscal Year 2008.