Bankruptcy Laws in the US - Essay Example

Bankruptcy allows those in debt, either an individual or a business, to have most of the debts discharged and allows the rights of the creditors to be protected as well. This essay will discuss the following bankruptcy situations:
Case # 1: A woman is the sole proprietor of a small business that is about to fail. She has accrued about $75,000 in debt and is unable to pay her creditors. She has decided to file for bankruptcy so she can settle up with his creditors and move on to another, hopefully, more profitable, business.
Case # 2: A client has maxed out his credit cards and can no longer afford to make the payments on his car. He has decided to file for bankruptcy.
Chapters 7, 11, and 13 are specific types of bankruptcy that can be declared by an individual or a business. Each case can file any of these types of bankruptcy, however, a specific chapter may be better suited for each case.
Case # 1
Chapter 11 is mainly bankruptcy for business and its purpose is to reorganize the debt of the business. Reorganization divides the credit accounts into different classes and assets are then liquefied and distributed. The debtor can devise a plan of reorganization for the approval of the court within a 120-day deadline or the debtor can request a court-appointed trustee to plan the reorganization. This chapter of bankruptcy allows the business to continue to operate during the bankruptcy under the supervision of the Bankruptcy Court. Chapter 11 allows for the liquidation of the business assets that are not immediately needed for the operation of the business and a plan for payment of the assets needed for the operation of the business. This will allow the sole proprietor in this case to stay in business and she can change her business to a more suitable and profitable business under the supervision of the court while at the same time eliminating the majority of her debt.
Case # 2
In this case, the debtor should file for chapter 7 bankruptcy. The debtor is assigned a trustee who liquidates assets and then divides the proceeds fairly among the creditors. This way any assets will be liquidated for the credit card debt, his debt will be wiped clean and he will be able to keep certain exempt assets. For example, he will be able to keep his car (as long as the value of the car isn’t excessively high) and car payments will be affordable because the credit card debts are discharged. One problem is that more information about his financial situation might prove that he cannot file for Chapter 7 bankruptcy. An individual is forced to file into a different chapter of bankruptcy if his income is above the median income for his state and family size. If his income is higher than the median income for his state he can afford it and will have to file for chapter 13 bankruptcy which is a debt consolidation type program eliminating only a portion of his debt and offering a payment plan for the remainder of the debt. He will still be able to keep his car but may have to pay more of his debt under this plan. As long as his income does not exceed the median income for his state then the best option would most definitely be to file for Chapter 7 bankruptcy.
Property exemptions in bankruptcy are similar from state to state because all states must follow federal guidelines. However, there are differences because some states are stricter than others. In Illinois, exemptions for a debtor’s place of residence include the value of the home up to the amount of $7,500 and may double for joint spousal bankruptcy. Personal property exemptions include a bible, clothing, medical supplies, a motor vehicle up to the amount of $1,200, and personal injury income up to $7,500. Alimony and child support are also exempt. Read More