Bankruptcy, although rightly a scary idea to many, is an important aspect to a functioning modern economy. While it helps individuals and businesses eliminate or repay debts it does not erase all financial responsibilities, contrary to popular belief.
– 1,221,091: total number of bankruptcy filings in the U.S. as of Dec 2012
What does it mean to “go bankrupt”?
– A process in which individuals or “consumers” and businesses can eliminate or repay some or all of their debts under the protection of the federal bankruptcy court.
– Crucial to the functioning of a modern economy
– Removes the burden of excessive debt and helps keep credit flowing in the economy
How It Works
– Operated by the United States Bankruptcy Courts, subunits of the federal district court system.
– These courts are supervised by bankruptcy judges appointed to 14-year terms by federal judicial committees.
– In most cases a trustee – one who administers the case by reviewing the debtor's documentation – is automatically appointed from a panel.
What Debts Can and Cannot Be Erased?
– Credit card debt
– Medical bills
– Unsecured loans
– Child support
– Spousal support
– Most tax debts
Goal of Bankruptcy:
– Desired outcome of any case is discharge – an order from the bankruptcy court permanently disallowing any creditor from attempting to satisfy a debt against a consumer or business – aka bankruptcy injunction.
– Discharge is permanent but not all inclusive – tax debts and spousal support are exempt
– Only given to honest debtors that disclose all their property and debts
Two Types of Filers:
Section 101 of the U.S. Bankruptcy Code defines consumer and business debt as the following:
– Consumer (nonbusiness) debt: that incurred by an individual primarily for a personal, family, or household purpose.
– Business debt: that held by a corporation or partnership, or the majority of debt incurred in relation to operation of a business.
– 1,181,016: total number of Consumer bankruptcy filings in the U.S. in 2012
– 40,075: total number of Business bankruptcy filings in the U.S. in 2012
TWO TYPES OF BANKRUPTCY:
– Liquidation – Chapter 7
– Reorganization – Chapter 11, 12, 13
Chapter 7 Bankruptcy:
– Bankruptcy Trustee may take and sell (“liquidate”) some or all of the property owned to pay back some of your debt.
– Property protected or “exempt” under state law is not liquidated (ex: clothes, car, and household furnishings)
– Can be filed by individual “consumers,” or businesses
– Typically lasts 3 to 6 months
– Property may be sold to pay down debt, in return most or all unsecured debts (debts for which collateral had not been pledged) will be erased
– Money owed on a secured debt (ex: a car loan for which the car is pledged as a guarantee of payment) can be processed in the following ways:
– Repossession of property
– Continued payment
– Lump sum equal to the value of property
– 843,545: total number of Chapter 7 filings in the U.S. as of Dec 20121
– 816,271: total number of consumer Chapter 7 filings1
– 27,274: total number of business Chapter 7 filings1
– Known as “wage earner” bankruptcy because a reliable source of income must be present in order to file
– Several types – Chapter 11, Chapter 12, Chapter 13
Chapter 11 Bankruptcy:
– Typically used by struggling businesses to reorganize affairs
– Also available to consumers, however it is expensive and time consuming
– Mostly used by individuals whose debts exceed the Chapter 13 bankruptcy limits (rare) or who own substantial nonexempt assets (ex: several pieces of real estate)
– 10,361: total number of Chapter 11 filings in the U.S. as of Dec 20121
– 1,461: total number of consumer Chapter 11 filings1
– 8,900: total number of business Chapter 11 filings1
Chapter 12 Bankruptcy:
– Almost identical to Chapter 13, except the eligibility requirements
– 80% of debts must arise from the operation of a family farm
– Higher debt ceilings to accommodate the large debts that may come with operating a farm
– Very few filers
– 512: total number of Chapter 12 filings in the U.S. as of Dec 2012
Chapter 13 Bankruptcy:
– Chapter 13 is the most common type for consumers
– All property is kept but monthly payments over three to five years to repay all or some of the debt is required
– Filer must propose a repayment plan – the minimum amount depends on earnings, amount owed, and the amount that unsecured creditors would have received if Chapter 7 bankruptcy were filed.
– Debts must be within limits set by the federal government – currently no more than $1,149,525 in secured debt and $383,175 in unsecured debt.
– 366,532: total number of Chapter 13 filings in the U.S. as of Dec 2012
– 363,280: total number of consumer Chapter 13 filings1
– 3,252: total number of business Chapter 13 filings1
FILING RATES ACROSS THE STATES:
Top 10 States with Highest Bankruptcy Filing Rate (2011):
Top 10 States With Lowest Bankruptcy Filing Rate (2011):
– District of Columbia
– South Carolina
– North Dakota
– South Dakota
– North Carolina
– New York
No clear answer why some states have higher rates of bankruptcy than others. Some possible reasons include:
– Income levels
– Medical debts
– State bankruptcy laws
RAGS TO RICHES:
Larry King – Popular talk-show host
– Filed in 1978 as a result of bad business deals
– Now worth an estimated $150 million
Donald Trump – American business magnate, socialite, television personality
– Filed for personal or business bankruptcy multiple times, including in 1991 and 2004
– Net worth is $2.9 billion with an annual salary of $60 million
– Trump properties include Trump Tower, valued at $288 million, Trump World Tower, valued at $290 million. In addition, the Trump name is licensed to properties worldwide, earning Trump an estimated $562 million.
– Reportedly earns $3 million per episode for The Apprentice TV show
Henry Ford – Founder – Ford Motor Company
– Filed in 1909
– Died at the age of 83 in 1947 at a net worth of $188.1 billion (Inflation adjusted value in 2008 dollars)
George Forman – Boxer/Grill Spokesman
– Filed in 1983 after losing over $5 million earned in his boxing career
– Current net worth is $250 million – Over $150 million from grill sales