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what is bankruptcy? 

  •  Bankruptcy is a court proceeding in which a judge and court trustee examine the assets and liabilities of individuals and businesses who can’t pay their bills and decide whether to discharge those debts so they are no longer legally required to pay them.

  • Bankruptcy laws were written to give people whose finances collapsed, a chance to start over. Whether it was bad decision-making or bad luck, lawmakers could see that in a capitalistic economy, consumers and businesses who failed, need a second chance. And nearly all of them get it!

  • Ed Flynn of the American Bankruptcy Institute (ABI) did a study of PACER stats (public court records) from fiscal year 2019 (Oct. 1, 2018 through Sept. 30, 2019) and found that there were 488,506 Chapter 7 bankruptcy cases completed that year, and 94.3% were discharged, meaning the individual was no longer legally required to pay the debt.

  • Only 27,699 cases were dismissed, meaning the judge or court trustee felt like the individual had enough resources to pay his/her debts.

  • Individuals who used Chapter 13 bankruptcy, best known as “wage earner’s bankruptcy,” were about split in their success. Slightly less than half of the 283,412 Chapter 13 cases completed were discharged (126,401) and 157,011 were dismissed, meaning the judge felt the person filing had enough assets to handle his/her debts.

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type of bankruptcy

There are several types of bankruptcy for which individuals or married couples can file, the most common being Chapter 7 and Chapter 13.

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  • Chapter 9: This applies only to cities or towns. It protects municipalities from creditors while the city develops a plan for handling its debts. This typically happens when industries close and people leave to find work elsewhere. There were just four Chapter 9 filings in 2018. There were 20 Chapter 9 filings in 2012, the most since 1980. Detroit was among those filing in 2012 and is the largest city ever to file Chapter 9.

  • Chapter 11: This is designed for businesses. Chapter 11 is often referred to as “reorganization bankruptcy” because it gives businesses a chance to stay open while they restructure the business’ debts and assets so it can pay back creditors. This is used primarily by large corporations like General Motors, Circuit City and United Airlines, but can be used by any size business, including partnerships and in some rare cases, individuals. Though the business continues to operate during bankruptcy proceedings, most of the decisions are made with permission from the courts. There were just 6,808 Chapter 11 filings in 2019.

  • Chapter 12: Chapter 12 applies to “family farms” and “family fishermen” and gives them a chance to propose a plan to repay all or part of their debts. The court has a strict definition of who qualifies and it’s based on receiving regular annual income as a farmer or fisherman. Debts for individuals, partnerships or corporations filing for Chapter 12 can’t exceed $4.03 million for farmers and $1.87 for fishermen. The repayment plan must be completed within five years, though allowances are made for the seasonal nature of both farming and fishing

  • Chapter 15: Chapter 15 applies to cross-border insolvency cases, in which the debtor has assets and debts both in the United States and in another country. There were 100 cases of Chapter 15 filed in 2018. This chapter was added to the bankruptcy code in 2005 as part of the Bankruptcy Abuse Prevention and Consumer Protection Act. Chapter 15 cases start as insolvency cases in a foreign country and make their way to the U.S. Courts to try and protect financially troubled businesses from going under. The U.S. courts limit their scope of power in the case to only the assets or persons that are in the United States.

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