CHAPTER 19 LESSON 2 BANKRUPTCY AS AN OPTION

CHAPTER 19, LESSON 2 BANKRUPTCY AS AN OPTION

WHAT IS BANKRUPTCY? • The legal process that relieves debtors of the responsibility of paying their debts or protects them while they try to repay • When you declare bankruptcy, you are said to be insolvent – your income and assets aren’t enough to pay back your debt • Bankruptcy is a second chance but it carries serious consequences.

TYPES OF BANKRUPTCY • Involuntary – Creditors file a petition with the court. – The court declares you bankrupt. – The court seizes your assets to pay off as much of your debt as possible. • Voluntary – Most common form of bankruptcy. – You file a petition with a federal court asking to be declared bankrupt. – The court notifies your creditors of your petition. – Creditors file claims. – The court decides how much debt you repay, what assets you keep, and which debts to cancel. • Discharged debts: debts erased by the court during bankruptcy; creditors can no longer seek payment for this debt

BANKRUPTCY PROCESS • Liquidation – Court sells the debtors’ assets and pays off as much of the debt as possible. – Remaining debt is discharged. • Reorganization – Debtors may keep property. – Must submit a payment plan to the court for repaying a substantial portion of their debt.

BANKRUPTCY FOR BUSINESSES • Chapter 11 – Reorganization form – Businesses can continue to operate under court supervisions – Debts must be repaid over time

BANKRUPTCY FOR INDIVIDUALS • Chapter 7 – Liquation form of bankruptcy – Wipes out most debt in exchange for most assets • Some assets (deemed necessary for survival) may be retained – Large debts and payments are wiped out • Chapter 13 – Reorganization form of bankruptcy – Debtors keep most of their property and use their income to pay a portion of debt over 3 to 5 years – Some debts will be totally discharged

REAFFIRMATION • Choosing to repay debts that have been discharged • You may choose to reaffirm to save the credit of a cosigner. • You may choose to reaffirm to stop repossession of collateral.

MAJOR CAUSES OF BANKRUPTCY • Job Loss – 2/3 of people in bankruptcy have been unemployed for a period of time before filing – Plan and save for emergencies! • Emotional Spending – Buy to meet your needs, not to impress others! • Failure to Budget and Plan – Many people who go bankrupt have no budget. – Poor planning can occur at any income level. • Catastrophic Injury or Illness

ADVANTAGES OF BANKRUPTCY • Debts are erased – A fresh start that lets you start over • Exempted assets are retained – Often includes a limited amount of equity in a residence, interest in a vehicle, personal property, furnishings. Clothing, some jewelry, and tools • Some incomes are not effected – Social security, veterans’ benefits, unemployment, alimony, child support, disability, and pension • Small cost – Costs include attorney’s fee and court costs, but debts are erased

DISADVANTAGES OF BANKRUPTCY • Credit is damaged. – Credit is destroyed for 7 -10 years. – You will most likely be unable to get any credit during that time. – If you do get credit, it will be at a very high interest rate (25% or more). • Property is lost. – Most of your assets will be sold. – You will get to keep a portion of money from the sale, but the rest goes to creditors. • You may not qualify for liquidation (Chapter 7) bankruptcy. – You might only be given the option to go through reorganization (Chapter 13) bankruptcy. – You will have to complete a 3 or 5 -year payment plan. • Some debts will be retained. – Child support, alimony, etc. – If a lender can prove you lied/misrepresented yourself on an application, that debt will not be erased. • Some debts you may still choose to reaffirm. • Cosigners must repay. – Forcing your cosigners to pay your debts to preserve their credit will likely damage your relationships with them.