Bankruptcy: A Legal Way Out - Essay Example

Bankruptcy: A Legal Way Out Bankruptcy is a legal way to discharge debt performed by preparing and filing a petition for bankruptcy in a federal bankruptcy court. Bankruptcy is a right that has been established by the United States Constitution with uniform laws which states have only a little control over. The three most common types of bankruptcy are Chapter 7, Chapter 13, and Chapter 11. A chapter 7 bankruptcy is performed when a debtor's assets are compiled and liquidated to pay creditors in order of priority.

After the assets are divided among the creditors, the creditors have no future right to collect the debtors' earnings because all debts are discharged. Anyone who has overextended their debts causing a struggle to pay their creditors may file bankruptcy. Debtors usually file bankruptcy when they have overextended their credit and are unable to pay both their debts and living expenses or the debtor has undue hardship like loss of employment or unexpected medical expenses. New laws have provided some limitations to this in order to prevent abuse of the system.

All debtors who wish to file bankruptcy must receive credit counseling under the new law. The debtor must have also filed their tax return from the previous year and provide proof of income in order to determine the best bankruptcy plan. If the debtor fails to meet this requirement, the courts then dismiss the bankruptcy. Debtors who want to file chapter 7 bankruptcy must meet the requirements of a "means test". The "means test" requires the debtors' income over the past six months must be less that the median income in the debtors' place of residence.

If the debtor meets this requirement then chapter 7 bankruptcy can be filed. If the requirement is not meet, then the debtor must file chapter 13 bankruptcy. Chapter 13 bankruptcy is a reorganization of debt in order for the debtor to repay all or a portion of the debt over a three-year period. Chapter 13 is often called the "wage earner plan" because it is often used for debtors who are earning an income and can pay at least $100 toward their debt a month. Under chapter 13 bankruptcy, some of the debt can be discharged but the rest of the debt must be paid under a court accepted payment plan.

Chapter 11 bankruptcy is usually filed by businesses that want to stay in business but are having financial trouble. This bankruptcy combines both chapter 7 and chapter 13 into one plan. Chapter 11 requires that the business divide current assets not necessary for normal operation of the business among creditors. Once theses assets are divided among the creditors, a plan of payment is established for the remainder of the debt and is to be paid with the future earnings of the business. This allows the business to have protection under the bankruptcy law while still being able to stay in business.

There are alternatives to bankruptcy and these alternatives should be attempted before deciding to file bankruptcy. Bankruptcy is a last resort for those who have no other way out of the cycle of debt and should not be used to discharge debt that can be paid by settling out of court.Bankruptcy tends to be more acceptable today then it has been in the past. When debtors file bankruptcy, it is understood that the debtor may just be trying to get out of a bad situation that is not necessarily any fault on behalf of the debtor.

There is economic pressure to encourage consumers to spend money in order to better the economy. Creditors provide credit to anyone who wants it regardless of their financial situation. Even now, there are credit companies that allow debtor who just recently filed bankruptcy to obtain credit under the stance that the debtor can afford the credit because they now have no debt whatsoever. Although, debtors who have file bankruptcy have discharged their debt, their income may prove that they cannot afford debt at all and the same situation may arise in the future where the debtor has the need to declare bankruptcy.

A debtor should not be frowned upon for filing bankruptcy, however, the credit companies should not give credit to just anyone. The credit companies' lax procedures for providing credit is the reason for increase bankruptcies filing and the increase acceptability of those who file.The Constitution provides a provision for bankruptcy making it a debtor right to file bankruptcy. The founding fathers understood the effects of business and consumer debt under extraordinary circumstances on the economy.

Therefore, there needed to be a way to control the detrimental affect on the economy that business and consumer debt creates. The founding fathers knew there was circumstance under which a debtor has no control over and therefore; bankruptcy should be declared only if there is no other solution to the problem. The new restrictions are necessary to prevent those who can pay form abusing the system by filing. It also prevents those who are seeking to avoid eviction, license suspension, and paying back alimony and child support from filing bankruptcy just to obtain an "automatic stay" or a deferral of these actions.

The founding fathers did not make the provision in order for debtors to avoid paying their debts. The provisions were made to aid those who are unable to pay due to undue economic hardship and distress.ReferencesAmerican Bankruptcy Institute: "Bankruptcy Abuse Prevention and Consumer Protection Act of 2005". http://www.abiworld.net/bankbill/.American Bankruptcy Website: "Personal Chapter 7 Bankruptcy". http://www.americanbankruptcy.com/.Jeffery Freedman Attorneys at Law: "Bankruptcy and Debt Relief".

http://www.jeffreyfreedman.com/bankruptcy-debtrelief/attorney.htm.News Article Delta Airlines and Northwest Airlineshttp://news.yahoo.com/s/ap/20051213/ap_on_bi_ge/ye_airlines_ye5a_1Worst May Be Over for Battered Airlines By DAVE CARPENTER, AP Business Writer Tue Dec 13, 3:02 PM ET CHICAGO - Eight airlines are flying in bankruptcy and jet fuel prices are still wrecking budgets after spiking to all-time highs this fall. 2005 marks a fifth straight year of multibillion-dollar losses. Yet there's reason for cautious hope that the worst may be over in the volatile U.S. airline business.

If oil prices continue their recent trend downward and no catastrophes occur, the industry could even return to a rarely visited destination in 2006: profitability We're not saying things are hunky-dory," said John Heimlich, chief economist for the Air Transport Association, the trade group representing U.S. airlines. "All we're saying is that some of the indicators we look at and some of the recent trends are promising, and that's the first time I've used that word in a long time."Walloped by more than $30 billion in losses since the 2001 terror attacks, airlines cut more labor costs, eliminated more unprofitable routes and reduced more capacity this year.

The restructuring has reshaped virtually every airline company, not just those operating under federal bankruptcy protection as 2005 wound down: United Airlines parent UAL Corp., Delta Air Lines Inc., Northwest Airlines Corp., ATA Airlines Inc., Aloha Airlines parent Aloha Airgroup Inc. and regional carriers Comair Inc., Independence Air parent FLYi Inc. and Mesaba Airlines parent MAIR Holdings Inc.It also helped produce fuller planes and much-improved operating results. Passenger unit revenue rose 4.

9 percent from January through October compared with a year earlier, according to the transport association.Supported by strong demand and record air travel volumes, the carriers even managed to quietly raise prices more than they had in years without scaring off passengers. Domestic fares this fall were up more than 8 percent from a year ago, industry figures show, and experts foresee more increases ahead."There's still a lot of pressure for fares to go higher," said Darryl Jenkins, a consultant to numerous airlines.

"We've got a robust enough economy that we can raise fares, and . that will bring a lot of relief to the industry."The changes have helped the industry improve its operating results by about $14 billion in the last two years, according to Airline Forecasts LLC, a Washington, D.C.-based consulting firm.But spending a projected $9.4 billion more on fuel than last year, according to Airline Forecasts, the industry in 2005 is expected to approach its worst-ever loss of over $10 billion in 2002."Fuel prices are the difference between record profitability (for some airlines) and a year of crappy losses," Heimlich said.

The situation looked catastrophic when crude oil surpassed $70 a barrel on Aug. 31 and jet fuel reached $2.60 a gallon - up from $1.16 at the start of the year - a month later. Not coincidentally, Delta and Northwest filed for Chapter 11 bankruptcy in September.Vaughn Cordle, the United pilot and financial analyst who heads Airline Forecasts, said the 13 largest U.S. airlines will collectively make money in 2006 if oil averages less than $55 - a level prices flirted with briefly in late fall. But the industry will lose nearly $1 billion for every dollar above that.

Two new factors weigh on the chances of returning to profitability. Carriers' ability to hedge fuel prices has been sharply reduced by both their lack of cash and high prices. And with so many in bankruptcy or otherwise borrowing heavily to finance restructuring, they face whopping interest costs on their debts, including an estimated $4 billion in 2005.Airline consultant Robert Mann is skeptical that the recent moderation of fuel prices and increase in unit revenue signifies a turning point, noting that all other predictions of recovery since 2002 have failed.

"Even if there is a slight turn-up, we're still faced with an industry which from a balance-sheet perspective is bankrupt," he said.Industry observers will be looking closely at two post-bankruptcy airlines that could set the tone for U.S. carriers next year.Experts say the integration of US Airways into America West Holdings Corp. could spawn similar airline mergers, although US Airways Group Inc. said recently that it will continue to report significant operating losses into 2006. United, meanwhile, is a much leaner and more internationally focused airline as it prepares to exit Chapter 11 in February than when it entered bankruptcy court three years ago.

"United's going to be the story next year," industry consultant Alan Sbarra predicted. "If they got the job done, they're going to be a force to be reckoned with. . I don't expect United to have Southwest costs, but they need to get close - to within 10 or 15 percent." ___ http://news.yahoo.com/s/ibd/20051217/bs_ibd_ibd/20051216industrySkies Looking Friendly Again Brian Deagon Fri Dec 16, 7:00 PM ET After five years of turbulence, the airline industry is finally reaching clearer skiesCompanies are still working through some of their toughest challenges, including bankruptcy reorganization and high fuel costs.

But it appears the worst is over.The industry's troubles began with the technology crash of 2000, which put the kibosh on business travel. Then came a recession in 2001 and the 9-11 terrorist attack. In 2002, the Asian Top of FormBottom of FormSARS virus hit, followed by the 2003 invasion of Top of FormBottom of FormIraq.That was just the start. A surge in oil prices in 2004 sent the price of jet fuel to an all-time high, soaring even higher in 2005.Then came Katrina. The hurricane temporarily wiped out 10% of U.S. oil production and pushed jet fuel prices even higher.

The result of all those problems Lots of red ink.Over the past four years, the airline industry has reported losses of $32 billion. Most of those losses came from the industry's old guard -- the seven so-called legacy carriers. And the massive shortfalls forced four of them into bankruptcy.Delta Air Lines and Northwest Airlines filed for Chapter 11 protection 10 weeks ago, joining UAL's (OTC BB:UALAQ.OB - News) United Airlines and US Airways (NYSE:LCC - News). The airlines in bankruptcy today account for half of all U.S. airline seats.

The filings were the only way for the industry to make significant changes to their business models, analysts say. Airlines were suffering from bloated bureaucracies, powerful unions and underfunded pension plans."The legal (reality) of Chapter 11 bankruptcy is that it's enabled carriers to terminate pension plans," said William Warlick of Fitch Ratings. "United and US Airways did that, and I think Delta and Northwest will follow that. It gives carriers leverage with unions and court approval for pay cuts.

"Jet fuel prices, meanwhile, are down from their peak. The economy is growing, and people are traveling more. "The industry is on the cusp of a major recovery," said Vaughn Cordell of AirlineForecasts, a consulting firm.1. BusinessThe airline business is simple. It's all about filling seats and flying full planes.A major problem is the airline industry had too many seats. When the U.S. economy was booming in the late '90s, the industry was fat and happy, and getting fatter. All the while, low-cost carriers like JetBlue Airways (NasdaqNM:JBLU - News) were entering the market and adding more capacity.

When the economy slowed and disasters struck, the sky began to fall. High jet fuel prices were the final straw.All that is changing. Since 2002, the airline industry has reduced seat capacity about 20%, by cutting daily routes, retiring old planes and buying smaller ones. Fitch believes capacity will shrink another 5% in 2006. As a result, planes are flying about as full as they've ever been, nearing 100% capacity during popular daytime flights."Revenue per seat is going up dramatically," said Cordell, who is also an airline pilot.

"That's a major development that's giving the airline industry pricing power."In the past year, the airlines have raised prices 17 times, he says.Still, revenue growth doesn't fall straight to the bottom line without cuts in operating expenses. U.S. commercial airlines reported an operating profit of $939 million last year but a net loss of $4.7 billion, partly a result of an extremely high debt load and the need to fund pension plans. To get back in the black, the airline industry has eliminated 44,000 workers this year, according to Challenger, Gray & Christmas.

Since 2001, the industry has cut more than 201,000 jobs. In 2000, United had 173 people per aircraft. It's now down to 116. And its annual labor cost has fallen to $4 billion, from $7 billion, Cordell says. Southwest Airlines, considered the most efficient large airline, has 72 employees per plane, down from 85. Name of the game: Airlines are doing all they can to squeeze out costs and rid themselves of excess capacity. It's the only way to stem massive losses and deal with the high cost of jet fuel. 2. Market A bump in passenger traffic is helping airlines recover.

In the first eight months this year, U.S. airlines carried 449 million domestic passengers. That's up 5%, or 22 million passengers, from the same period a year ago, according to the Department of Transportation. Planes were 78% full, up 3% from a year ago. The amount of flights flown rose a modest 1.6%, suggesting greater efficiency. There were 442 fewer passenger jets in 2004 than in 2000. The large legacy carriers actually cut 513 aircraft, while the low-cost carriers added 200 aircraft. "For the first time since 1999, we will see significant year-over-year improvements in revenue per available seat," said Warlick.

In 2004, the number of passengers increased 7%. The Department of Transportation estimates passenger traffic growth this year will be up another 3.5%. "Aviation demand, which rebounded strongly in 2004, is expected to continue to exhibit relatively strong growth throughout our 12-year forecast," the agency said in its annual report on the industry. 3. Climate The biggest factor impacting airlines is something they have little control over: fuel costs. Jet fuel prices are down from their peaks, but they're still at historically high levels.

And that will continue to plague the industry. The airlines have found ways to improve fuel efficiency, though. It costs $12,000 to fill the gas tank of a 747. One large airline estimated it saves 17 gallons annually for each pound of weight removed per plane. It shed in-flight phones, some ovens and galley equipment and excess potable water. Alaska Airlines has said that removing just five magazines per aircraft could save $10,000 per year in fuel costs. Another nagging problem: Airlines still have significant amounts of debt -- close to $100 billion.

"The operating environment for 2006 looks stronger, but given the heavy debt load and high degree of fixed obligations, it will be a multiyear effort to reconstruct the balance sheets," said Warlick. In the long run, inexpensive tickets, a strong national economy and increasing demand for seats aboard aircraft should bode well for the industry, says the Air Transportation Association. 4. Technology The airline industry uses one of the most sophisticated reservation systems ever developed. But it's largely a shared system, meaning that airline companies don't really gain any competitive edge over another.

All the airlines also have adapted to the Web, offering sophisticated travel reservation services that make it easy for people to book flights themselves. Airlines have tried to differentiate themselves with in-flight entertainment systems. But nothing is proprietary. One airline can copy what another does, if they want. And airlines in the past few years have focused more on cutting costs than on beefing up entertainment technology. 5. Outlook Though industry conditions look much better now than a few years ago, additional work needs to be done.

For one, more consolidation is needed, some in the industry say. Doug Parker, who orchestrated the recent merger between America West Airlines and US Airways, expects to see similar deals in the future. "We're on the leading edge of a legacy carrier restructuring that has to take place," he said at a conference this month. But other legacy carriers are still trying to go it alone, notes Dan Kasper, managing director of LECG, an airline consulting firm. "You still have a very mixed picture," he said.

"Some carriers have restructured, some are almost through, but you still have Delta and Northwest trying to get there." Unlike some analysts, Kasper isn't sure that mergers are the way to fix industry woes. "My guess is we'll see consolidation through attrition rather than through combination," he said. "Airline mergers are difficult to pull off." And no matter what the large legacy carriers do, they still must confront the low-cost carriers. Business customers will not pay premium fares if they don't have to.

Low-cost carriers will get passengers to the same destination for a lower price, albeit often without the perks and special service. Upside: Restructuring has shed excess capacity and enabled airlines to fly fuller planes at a profit. If passenger traffic continues to grow, airlines will be in better shape. Risks: Further shocks to oil prices or an economic slowdown could be more than some carriers can handle, thus possibly forcing them into liquidation.