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Bankruptcy Economics Ms. McRoy Slide 2 Aim What are the effects of filing for bankruptcy? Slide 3 Bankruptcy What is it? A legal process in which some or all of the assets of a debtor are distributed among creditors because the debtor is not able to pay his/her debts. Debtor the borrower Creditor the lender Note: it may also include a plan for the debtor to repay creditors on an installment basis. Slide 4 Types of Bankruptcy Chapter 7 aka a straight bankruptcy or liquidation bankruptcy The debtor (person or business) must submit a petition to a U.S. district court Many, but not all, debts are forgiven Most of the debtors assets are sold to pay off creditors Certain assets receive protection: Social Security payments, unemployment compensation The release from debt does not forgive: alimony payments, child support payments, certain taxes, fines, certain debts arising from educational loans Slide 5 Types of Bankruptcy (contd) Chapter 13 aka a wage-earner plan bankruptcy A debtor (i.e. individual) with a regular income proposes a plan to the court for using future earnings or assets to eliminate his/her debts over a specified period of time. The debtor normally keeps all or most of his/her property. Payments are made to a Chapter 13 trustee. Slide 6 Types of Bankruptcy (contd) Chapter 11 Available to all businesses (e.g. sole proprietorships, partnerships and corporations) Permits reorganization Similar to a Chapter 13 filing for individuals, where arrangements are made for re-payment. The trustee to operate the debtor's business. In chapter 11, unless a separate trustee is appointed for cause, the debtor, as debtor in possession, acts as trustee of the business. Slide 7 Types of Bankruptcy (contd) Chapter 12 Similar to Chapter 13 in structure, but it offers additional benefits to farmers and fishermen in certain circumstances, beyond those available to ordinary wage earners. It is applicable only to family farmers and fishermen. Slide 8 Historical Bankruptcy Filings Total Bankruptcy Filings by Bankruptcy Chapter Years Ended March 31, 2008-2012 Chapter Year7111213 2012958,75711,339606396,175 20111,118, 48113,051743438,788 20101,100,03215,251605415,966 2009819,30411,774367370,836 2008560,0156,971343334,551 Source: http://www.uscourts.gov/News/NewsView/12-05-09/Bankruptcy_Filings_Down_13_Percent_for_March.aspxhttp://www.uscourts.gov/News/NewsView/12-05-09/Bankruptcy_Filings_Down_13_Percent_for_March.aspx Slide 9 Effects of Bankruptcy Easier to obtain credit if file for Chapter 13 versus Chapter 7. Bankruptcy reports are kept on file with credit agencies for 7-10 years. Slide 10 Aim What are the effects of filing for bankruptcy?