Chapter 7 Bankruptcy
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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.
QUESTIONS:
Who may file Chapter 7 bankruptcy? How has this changed over the past year?
What are some of the reasons people file bankruptcy?
How does bankruptcy affect interest rates on loans? Credit cards?
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Solution Summary
This solution discusses who may file Chapter 7 bankruptcy and if this has changed over the past year. Some of the reasons people file bankruptcy are also explored, as well as how bankruptcy affects interest rates on loans and credit cards. Supplemented with additional information on chapter 7 bankruptcy and recent reforms.
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Please see response below. I also attached extra resources, which I make reference to in the following response.
RESPONSE:
Let's take a closer look at the following three questions, which you can then draw on for your 1-page report.
1. Who may file Chapter 7 bankruptcy? How has this changed over the past year?
In general, when a troubled business is badly in debt and unable to service that debt or pay its creditors, it may file (or be forced by its creditors to file) for bankruptcy in a federal court under Chapter 7 (liquidation) or Chapter 11 (reorganization). A Chapter 7 filing means that the business intends to sell all its assets, distribute the proceeds to its creditors, and then cease operations. This may or may not mean that all employees will lose their jobs; when a very large company enters Chapter 7 bankruptcy, it may be that entire divisions of the company are sold intact to other companies during the liquidation (http://en.wikipedia.org/wiki/Chapter_7%2C_Title_11%2C_United_States_Code).
"Means Test"
The court may dismiss a chapter 7 case filed by an individual whose debts are primarily consumer rather than business debts if the court finds that the granting of relief would be an abuse of chapter 7. 11 U.S.C. § 707(b). If the debtor's "current monthly income"(1) is more than the state median, the Bankruptcy Code requires application of a "means test" to determine whether the chapter 7 filing is presumptively abusive. Abuse is presumed if the debtor's aggregate current monthly income over 5 years, net of certain statutorily allowed expenses, is more than (i) $10,000, or (ii) 25% of the debtor's non-priority unsecured debt, as long as that amount is at least $6,000. (2) The debtor may rebut a presumption of abuse only by a showing of special circumstances that justify additional expenses or adjustments of current monthly income. Unless the debtor overcomes the presumption of abuse, the case will generally be converted to chapter 13 (with the debtor's consent) or will be dismissed. 11 U.S.C. § 707(b)(1). http://www.uscourts.gov/bankruptcycourts/bankruptcybasics/chapter7.html#eligibility).
Specifically, to qualify for relief under chapter 7 of the Bankruptcy Code, the debtor may be an individual, a partnership, or a corporation or other business entity. 11 U.S.C. §§ 101(41), 109(b). Subject to the means test as described above, for individual debtors, relief is available under chapter 7 irrespective of the amount of the debtor's debts or whether the debtor is solvent or insolvent. An individual cannot file under chapter 7 or any other chapter, however, if during the preceding 180 days a prior bankruptcy petition was dismissed due to the debtor's willful failure to appear before the court or comply with orders of the court, or the debtor voluntarily dismissed the previous case after creditors sought relief from the bankruptcy court to recover property upon which they hold liens. 11 U.S.C. §§ 109(g), 362(d) and (e). In addition, no individual may be a debtor ...
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