1. 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.

2. 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.

3. PURPOSES OF BANKRUPTCY  Two purposes for Bankruptcy 1) Give the debtor a fresh start. 2) Ensure fair treatment for creditors

4. 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.

5. TYPES OF BANKRUPTCY  Chapter 7 Bankruptcy  Chapter 11 Bankruptcy  Chapter 13 Bankruptcy

6. 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

7. 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.

8. 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.

9. 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.

10. 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.

11. ASSIGNMENT  Pg. 296 – problems 1-13, 20