The Declaration of Bankruptcy as a Legal Way - Research Proposal Example

? Bankruptcy is a legal inability to pay debts. Samuel Blankson (2004) simply described the declaration of bankruptcy as a legal way of cancelling all payment to creditors. It is a way of dealing with debts that one cannot pay. Two main parties are involved in a bankruptcy. First is the debtor. The debtor is a person or entity owing the money. It is the party that files for a bankruptcy relief. The other one is the creditor. It is a party or a company owed by the debtor and is claiming that the debts are due to them by the debtor. Most bankruptcies would not only involve one creditor but many. Debts are usually classified as secured and unsecured (Bankruptcy Alberta, n.d.). Secured debts originate from valuable assets that come with a security agreement allowing a creditor to take back the assets if a debtor fails to pay or abide by the terms of the agreement with the creditor. Car leases, home mortgages, rent-to-own and other installment purchase contracts are examples of secured debts. The assets such as the car or house in these contracts are given up as collateral if the debtor is unable to pay. The second type of debts is the unsecured debt. This type of debt includes credit cards, overdrafts and the general day-to-day bills that people pay on a regular basis. These debts are often referred to as trade debts. For secured debts, when a debtor is declared bankrupt, the creditor cannot make him pay and his chance to take back the assets from the debtor is very limited. For unsecured debts, the creditors cannot force a debtor who is declared bankrupt to pay regular bills. Unsecured contracts are terminated by a bankruptcy. If a debtor receives a discharge from bankruptcy, the creditor’s right to collect no longer exists. Several laws including the Bankruptcy Code enacted in 1978 govern all bankruptcy cases. The primary goal of these laws is to give debtors a financial fresh start from burdensome debt. It allows the debtor to start anew, uninhibited by the pressures and discouragements of preexisting debts. The goal to cancel debts is accomplished by a bankruptcy discharge. It is a publication that basically releases the debtor from being liable for specific debts and forbids the creditor to take any action against the debtor to collect those debts. The bankruptcy discharge is in a question-and-answer format. It seeks to provide information regarding the timing of the discharge—which of the debts are discharged and which are not, any objections to the discharge and how the discharge can be revoked. It also includes the actions a debtor can take in the case that the creditor still collects a discharged debt after the bankruptcy is concluded. There are other parties involved in a bankruptcy. Filing a bankruptcy cannot be easily done by any person who wishes to be relieved of debts. He must first be qualified to be declared bankrupt. The party responsible for this is the bankruptcy judge, who functions as a judicial officer. He decides whether or not a debtor is eligible for bankruptcy and whether or not he should be should be discharged of his debts. More often than not, the bankruptcy process is conducted away from the courthouse because it is administrative. In some cases, another party, the trustee is appointed to oversee the case. The trustee is appointed through the United States Trustee Program of the Department of Justice. He administers the bankruptcy and represents the interests of the bankruptcy estate (Shoemaker & Dart, P.S., 2010). By far, there had been many types of bankruptcies but generally, there are three main types. The types of bankruptcies are named after the chapters in which they appear in the Bankruptcy Code. In most resources, these three types of bankruptcies are considered the main types: Chapter 7, Chapter 11, and Chapter 13. The Chapter 7 type of bankruptcy is entitled Liquidation. It is sometimes called “straight bankruptcy” (Adamson, 2011). This involves the sale for cash of nonexempt property (includes such assets as bank accounts, stocks and bonds) and the distribution of the proceeds to the creditor. Because there is usually almost no nonexempt property in most Chapter 7 cases, there may not actually be a liquidation of the debtor’s assets. These cases are called “no-assets” cases. The creditor holding an unsecured claim can only get a distribution from the bankruptcy if it is an asset case and if he files for a proof of claim with the bankruptcy court. This is the most common type of bankruptcy and in this type, the debtor receives a discharge just a few months after he actually filed the petition. His eligibility to be declared bankrupt has to undergo a “means test” first before he is granted the bankruptcy relief. Usually, if his income is beyond a certain threshold, he may be denied of eligibility of a Chapter 7 bankruptcy. The next type of bankruptcy is the Chapter 11 bankruptcy entitled Reorganization. This is designed to keep an organization, partnership or sole proprietorship in active business with no liquidation. Here, the debtor submits a plan to the bankruptcy courts, which then approves or disapproves its provisions (Kelly and McGowen, 2011). The plan basically pleads for only a partial repayment of debts. Also, it may propose changes to (or the termination of) burdensome contracts as well as other changes in its operations. The creditors vote on the plan prior to the court’s approval. This type of bankruptcy is usually for corporations but individuals may actually file this type. The third main type of bankruptcy is Chapter 13, entitled Adjustment of Debts of an Individual with Regular Income. In this type, individuals work with a court-appointed trustee to establish a court-approved plan that adjusts their debt payments to a more manageable level. Chapter 13 bankruptcy can be thought of as a Chapter 11 bankruptcy for individual debtors. This often involves spreading the payments over a long period of time, or may involve only repaying a portion of the total amount owed. The debtor must agree to turn over enough income to the trustee to ensure that the plan will be carried out. Here, the debtor may keep his home, car, and other personal assets as long as he makes all of the required payments. Once the plan has been completed, the debts are declared fully discharged. Figure 1. US Bankruptcy Filings from 2006 to 2010. (Retrieved from Bankruptcyaction.com) Figure 1 shows the number of US Bankruptcy Filings from 2006 to 2010. A general trend can be seen here—that the number increases over the said years. It can also be seen that there are more non-business debtors filing for bankruptcy and business ones. Non-business filings totaled 1,536,799 in CY 2010, up 9 percent from the 1,412,838 non-business bankruptcy filings in CY 2009. This is the highest number of non-business filings for a fiscal year since CY 2006 , immediately prior to the implementation of the Bankruptcy Abuse Prevention and Consumer Protection Act in October 2006 (BankruptcyAction, n.d.). Figure 2. US Bankruptcy Filings from 1980 to 2009 (Retrieved from BankruptcyAction.com) Figure 2 allows us to see the larger scale—giving us the number of US bankruptcy filings from 1980 to 2009. The general trend is the same—the number of filings increase over time. There is a sudden decrease however in the year 2006. This is perhaps due to the implementation of the Bankruptcy Abuse Prevention and Consumer Protection Act in October 2006. It was actually passed in 2005 and it aimed to make it more difficult for debtors to file a Chapter 7 Bankruptcy—under which most debts are forgiven or discharged—and instead required them to file a Chapter 13 Bankruptcy—under which the debts they incurred are discharged only after the debtor has repaid some portion of these debts (Grassley, 2005). In Figure 2, it can be seen that the number of filings has quickly recovered over a span of around only two to three years, as compared to the years before 2005 or 2006 where the increase has not been attained in a very fast manner. This means that more and more people are opting to file bankruptcy than ever. This may be due to the prevalent recession in the country. The price of commodities have surged more than ever and the income of households or businesses are slowly becoming insufficient, leading to the eventual inability to pay bills and debts, which in turn may pose the debtor a last-resort which is to file for bankruptcy. Bankruptcy has been viewed as something so negative, but thinking about the goal of establishing bankruptcy laws in the first place may alter the mindset of Americans. It is to give the debtor a new start. Debtors include both individuals and businesses. This is greatly helpful to business—they would not have to terminate their operation but they can move on for as long as they are eligible for bankruptcy. Chapter 7 Bankruptcy is no doubt the easiest way out but as provided by the Bankruptcy Abuse Prevention and Consumer Protection Act, there would now be more difficulty to apply for a Chapter 7 Bankruptcy. The Act prefers the Chapter 13 type over the Chapter 7. Though many would have gone for a Chapter 7 Bankruptcy, choosing a Chapter 13 Bankruptcy may be a better option for businesses. Being discharged from a Chapter 7 type of bankruptcy will mean that the business gives its creditor no chance of taking hold of its assets and that the indebted business will have no obligations whatsoever to pay the creditor. This may mean damage to the name of the business, hinting to its consumers that indeed it is too unable to pay its debts. It may also be a brand of irresponsibility for not allowing itself to be subject to the consequences it deserves. A Chapter 7, though financially more beneficial for the business since it has to make no payments, may be utterly demeaning for the business psychologically from the point of view of its clients. In contrast, Chapter 13 Bankruptcy may actually be beneficial for a business. Here, a debtor still actually pays the debt, although in some cases, lower than the actual debt. The debt is paid but not on a one-time deal. It is still going to be paid but over a period of time, in installments. If a business has this type of bankruptcy, it suggests, in the very least, that it still has the capacity to pay, although not in one setting. This suggests that the business still “has the goods to back it up”. This may be more tolerable in the perspective of its clients compared to the Chapter 7 Bankruptcy which hints a zero capacity to pay. The Chapter 13 Bankruptcy saves the business a good name. In addition to that, Chapter 11 may provide another solution to the business if it does not opt for Chapter 13. It will allow the business to make a reorganization plan that is suitable to its situation and with full knowledge of its capacity to pay. The creditor is paid eventually of the debt and the indebted business pays in a manner that is feasible for its condition. The creditors would also have signed the plan if approved, thus, both ends meet. Also, bankruptcy had been viewed negatively in the past, but with the advent of a rapid increase in filings over the last few years, more and more people are becoming open to it, especially that the country is undergoing a time of recession. So, it could be said that filing a bankruptcy today may be less disreputable than it was before. Keeping the notion that the goal of declaring bankruptcy is to give an individual or business a new start may be a very simple remedy to the mindset built over decades ago. Anyway, if a debtor is after his status’ sake, he can still opt to choose from a variety of bankruptcies that will save his name the most. Some people associate bankruptcy with having a negative effect on the family. The Law Offices of Paul Horn (2010) makes a good point. It said that “financial stress often leads to a very strained relationship with your spouse and family. Bankruptcy laws exist to allow you to obtain relief from financial difficulties. Many people discover that eliminating the financial stress is the first step toward recovering your family relationships.” It is good to note that the amendment of the bankruptcy law was carried out because of some loopholes. Although bankruptcy protection is supposed to apply only due to the time of filing, many delinquent owners file for Chapter 7 Bankruptcy to avoid their obligation to pay all fees, including those owed months after the bankruptcy filing. However, since all filings had to be scrutinized for eligibility, those filed by delinquent owners cause delay. Instead of catering the needs of most likely eligible debtors, the process taken to assess the filings done by delinquent ones takes a lot of time. The amendment to the old bankruptcy law is a solution to this. It is now harder to file for a Chapter 7 Bankruptcy, thus, ruling out the delinquent ones. Bankruptcy, at its core, was passed to law to help those who are struggling with their debts and are wanting to have a fresh start. There are different types of Bankruptcies and the debtor has the freedom to wisely choose which one best suits him to alleviate his financial state. Amendments to the old bankruptcy law have been made to rule out loopholes from the old one, making sure that the law is not abused. A new mindset of perspective of bankruptcy may be of help for people to welcome the idea of bankruptcy when the need arises. References: Adamson, J.E. (2011). Business Law. Mason, Ohio: South-Western Cengage Learning. BankruptcyAction. (n.d.) Business and Non-Business Filings. Retrieved 24 July 2011 from http://www.bankruptcyaction.com/USbankstats.htm Bankruptcy Alberta. (n.d.) Types of Debt. Retrieved 24 July 2011 from http://www.bankruptcyalberta.net/secured-unsecured-debt-alberta/ Blankson, S. (2004). How to Destroy Your Debts. Samuel Blankson. Grassley, C. (2005). Opening Statement of Sen.Chuck Grassley at the Bankruptcy Reform Hearing. Retrieved 23 July 2011 from http://grassley.senate.gov/news/Article.cfm?customel _dataPageID_1502=9716 Horn, Paul. (2010). Common Misconceptions About Bankruptcy. Retrieved 24 July 2011 from http://paulhornlawfirm.com/mythfactofbankruptcy.html Kelly, M. and McGowen, J. (2011). BUSN. Mason, Ohio: South-Western Cengage Learning. Shoemaker and Dart. (2010). Bankruptcy 101. Shoemaker & Dart, P.S., Inc. Retrieved 24 July 2011 from http://shoedartlaw.com/bankruptcy-101 Read More