LESSON 9-2 BANKRUPTCY CHOICES
Learning Goals:
-Explain the reasons for and purposes ofbankruptcy and list strategies for avoidingbankruptcy.
-Describe the different types ofbankruptcy.
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 intobankruptcy.
Bankruptcy should be avoided if at all possible, but there are cases wherebankruptcy 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 Bankruptcy
1)Give the debtor a fresh start.
2)Ensure fair treatment for creditors
AVOIDING BANKRUPTCY
Credit Counseling is a service to help consumersmanage 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 yourcreditors to create a workable plan for paying offdebt.
Debt Consolidation is the process of getting one loanwith a single monthly payment to pay off all of yourdebts.
An equity loan is a second mortgage or debt securedwith 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 thedischarge of debts.
A discharge is a court order the pardons the debtor from havingto pay debts.
The debtor assets are sold and the money is used to repay asmuch of the debt as possible. Then the remaining debt isdischarged.
Some debts can not be discharged. These include:
Tax debt, student loans, government fines, child support, spousalsupport
Some property is exempt from having to be forfeited and sold topay 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 asdecided by the court so that a business can remainviable.
Allows business to retain possession of its assets andremain in operation after a plan for reorganization isfiled and approved by the court.
The purpose of Chapter 11 Bankruptcy is to make surethat the business can in fact be viable after thebankruptcy 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 ofsteady income. It is used mostly by homeowners andworking people.
Rather than liquidate assets, debtors follow a court-approved plan to pay back as much debt as they canover a three to five year period. After that time, theremaining balances on debts are discharged it all thepayments in the plan were made.
Chapter 13 forces creditors to stop interest and latepenalties.
THE BANKRUPTCY ABUSE PREVENTION ANDCONSUMER PROTECTION ACT OF 2005
Made it difficult for consumers to erase all debt byrequiring more people to file Chapter 13 instead ofChapter 7 Bankruptcy.
Law is designed to crack down on debtors who usebankruptcy laws to run up and then avoid debts.
BANKRUPTCY FRAUD
Bankruptcy fraud is the abuse of bankruptcy laws in away that favors the debtor and defrauds creditors.
Bankruptcy fraud is a federal crime.
Must reveal all assets, not hide them from thebankruptcy court.
Assets must be disclosed so that creditors can receivea fair share of the debt repaid.
Creating debt with the intent of denying creditorspayment for goods and services is also illegal andunethical.
ASSIGNMENT
Pg. 296 – problems 1-13, 20