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    Chapter 7 Bankruptcy Issues

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    During the decade of the 1990s, business and personal bankruptcies soared. This happened in spite of the greatest economic boom in US history. It was also a boom time for lawyers specializing in the intricacies of bankruptcy law. In 1998, a record 1.4 million businesses and individuals filed for protection under the bankruptcy code, a 300 percent increase since 1980. Ninety-six percent of the filings were personal bankruptcies; however, in 1999, the number dropped 8.5 percent.

    Many analysts attribute the high number of bankruptcies to aggressive credit offers by banks and, to a lesser extent, department stores. These companies lure even the most credit challenged (young people and those who have problems managing money) into accepting their credit cards, sometimes offering secured lines of credit, where the cardholder places as little as $100 in a savings account and receives a line of credit five times that amount.

    Another reason cited by analysts for the increase is that the old stigma associated with bankruptcy-if you filed for bankruptcy protection, you were somehow inferior and to be looked down upon-no longer exists in most areas of the country. A third reason is a change in attitude of the credit cards issuers. Not long ago, if an individual filed for bankruptcy, that person was unable to obtain credit for years (a bankruptcy filing remains on your Credit Bureau file for 10 years). Today, however, credit card companies operate on a different premise. If you have recently filed for bankruptcy, you are no longer in debt. Therefore, you must have sufficient cash flow to service new debt. Within a month of filing, your mailbox will be flooded with credit card offers.

    In the business arena, filing for bankruptcy-stopping creditors from taking legal action-has evolved into just another business strategy.

    The three most common types of bankruptcy are:

    Chapter 7: The bankrupt's assets are sold to pay creditors, and creditors have no right to the debtor's future earnings.

    Chapter 11: A business continues to operate and creditors receive a portion of both current assets and future earnings. This form of bankruptcy is also available to wealthy individuals. (See Wards.com)

    Chapter 13: For the typical consumer, where creditors usually receive a portion of the individual's current assets and future earnings.

    Although bankruptcy laws are sometimes abused (an individual may file personal bankruptcy every seven years and some individuals do exactly that), bankruptcy is designed as a safety net for businesses or individuals who experience financial difficulties for whatever reason.


    1. Who may file Chapter 7 bankruptcy? How has this changed over the past year?
    2. What are some of the reasons people file bankruptcy?
    3. How does bankruptcy affect interest rates on loans? Credit cards?

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    Solution Preview

    Interesting set of questions! Let's take a closer look at the three question individually, which you can draw on for your final copy.


    1. Who may file Chapter 7 bankruptcy? How has this changed over the past year?

    Under the old bankruptcy rules, the bankruptcy judge had the power to dismiss a Chapter 7 case if she or he thought the debtor had sufficient disposable income to fund a Chapter 13 repayment plan. However, there were no hard and fast rules dictating when a judge should dismiss a case on these grounds -- it depended on the facts of the case and the attitude of the judge (Elias, Renauer, & Leonard (Nolo), 2007).

    Under the new bankruptcy law, however, there are clear criteria that dictate who will be allowed to stay in Chapter 7 bankruptcy -- and who will be forced to use Chapter 13 bankruptcy if they want to file. Two groups of people, mainly, disabled veterans whose debts were incurred during active duty and people whose debts come primarily from the operation of a business get a fast pass to Chapter 7. For example, according to Elias, Renauer, & Leonard (Nolo), (2007), everyone else must meet the requirements set out below:

    a. How high is Your Income?

    Under the new rules, the first step in figuring out whether you can file for Chapter 7 is to measure your "current monthly income" against the median income for a family of your size in your state. Your "current monthly income" is your average income over the last six months before you file. If your income is less than or equal to the median, you can file for Chapter 7 and the new Means Test does not apply. Even if you or your household income is above the above income figures, you may still qualify for Chapter 7 bankruptcy if you pass the new Means Test. In other words, if your income is more than the median, you must pass "the means test" -- another requirement of the new law -- in order to file for Chapter 7 (Elias, Renauer, & Leonard (Nolo), 2007).

    b. Means Test

    The purpose of the means test is to figure out whether you have enough disposable income, after subtracting certain allowed expenses and required debt payments, to repay at least a portion of your unsecured debts over a five-year repayment period (Elias, Renauer, & Leonard (Nolo), 2007).

    c. Who cannot file Chapter 7 Bankruptcy?

    You cannot file for Chapter 7 bankruptcy if you obtained a discharge of your debts in a Chapter 7 case within the last eight years, or a Chapter 13 case within the last six years. You cannot file for Chapter 7 bankruptcy if a previous Chapter 7 or Chapter 13 case was dismissed within the past 180 days because:

    · You violated a court order
    · The court ruled that your filing was fraudulent or constituted an abuse of the bankruptcy system, or
    · You requested the dismissal after a creditor asked for relief from the automatic stay (Elias, Renauer, & Leonard (Nolo), 2007).

    If you defrauded your creditors, a bankruptcy court may dismiss your case if it thinks you have tried to cheat your creditors or concealed assets so you can keep them for yourself. For example, certain activities are red flags to the courts and trustees. If you have engaged in any of them during the past year, your bankruptcy case may be dismissed. Elias, et al., (2007) point out several 'no-nos' such as:

    · Unloading assets to your friends or relatives to hide them from creditors or from the bankruptcy court
    · Running up debts ...

    Solution Summary

    This solution explores who may file Chapter 7 bankruptcy, and if this has changed over the past year. It also discusses some of the reasons why people file bankruptcy and how bankruptcy affects interest rates on loans and credit cards.