Page 73 - Encyclopedia of Business and Finance

eobf_B 7/5/06 2:55 PM Page 50

Bankruptcy

The basic premise for enabling debtors to file for • Debtor’s aggregate interest up to $18,450 in value in
bankruptcy is to have a “fresh start” by permitting them real or personal property used as a residence, cooper-
to end their overwhelming debt and begin anew to rebuild ative, or burial plot
their credit and engage in day-to-day activities without • Debtor’s interest in one motor vehicle up to $2,950
fear of creditors seizing their assets and imposing liens on in value
their salaries. Congress had concluded that a sizable per-
centage of debtors had taken advantage of liberal Bank- • Debtor’s interest up to $475 in any particular item
ruptcy Code provisions and grossly abused their credit or $9,850 in total value in household furnishings
access. Thus, Congress imposed a number of roadblocks and goods, and various personal items, such as
to the discharge of indebtedness while refraining from clothing
limiting creditors’ persistent inundation of offers of credit • $1,225 in value for jewelry for personal, family, or
to consumers—especially by credit card companies.
dependent use
The Bankruptcy Code contains a number of chap-
ters, including preliminary sections concerning proce- • Any property up to $975 plus up to $9,250 of any
dural and administrative requirements and substantive unused amount of exemption
chapters that detail requirements for debtors regarding • $1,850 in any implements, professional books, tools
liquidation, reorganization, or adjustment of debts. The of trade
most relevant chapters are 7, 11, and 13.
• Unmatured life insurance
• Prescribed health aids
CHAPTER 7 LIQUIDATION
PROVISIONS • Various other benefits and payments, such as Social
security
The most significant change to the 1978 statute concerns
consumer bankruptcy under the Chapter 7 liquidation
provisions. Previously, debtors had the choice of filing for Priority of Distributions. Not all creditors are treated
liquidation—which means that debtors are completely alike with respect to the distribution of net assets that
discharged from all indebtedness except for certain remain after the deduction of costs, expenses, and other
nondischargeable debts, after their assets have been indebtedness. The order of distribution of assets remain-
reduced to cash and distributed to creditors—or filing a ing is as follows:
plan under Chapter 13 with the court for the payment of
1. Secured creditors to the extent of their security on
all or part of the indebtedness.
specific property (e.g., mortgage interest on real
The act continues the choice but now requires con-
property)
sumer debtors electing to file under the act to initially
secure credit counseling within 180 days preceding the fil- 2. Unsecured domestic support obligations
ing and to provide a certificate from an approved non- 3. Administrative expenses
profit budget and credit counseling agency concerning
services provided to the debtors, including a copy of the 4. Claims up to $10,000 earned by the creditor within
repayment plan, if any. The act also continues to permit 180 days of filing or cessation of business for wages,
debtors to have their debts discharged, after compliance sales, or commissions
with the statute, and to possess a not-insignificant amount 5. Contributions to an employee benefit plan arising
of assets upon termination of the proceeding. within 180 days of filing or cessation of business up
to $10,000 per employee
Exemptions. Contrary to what many persons believe, the
6. Claims of persons engaged in farming or fishing up
debtor being discharged in bankruptcy is able to retain a to $4,925 each
substantial amount of property (which would be double
the sum if there is a joint filing). This is a further induce- 7. Other claims for rental, sale, or use of property or
ment to seek bankruptcy protection before being reduced services rendered up to $2,225
to an impoverished condition. The assets that a bankrupt 8. Certain claims by governmental entities including
person may retain are: income and property taxes

• Interest in property held jointly or as tenants by the 9. Claims for death or personal injuries arising from
entirety if the tenant is exempt from the process use of an automobile or vessel while debtor was
under nonbankruptcy law intoxicated
• Retirement funds pursuant to statute 10. All other indebtedness

50 ENCYCLOPEDIA OF BUSINESS AND FINANCE, SECOND EDITION