Bankruptcy Code Offers Various Filing Options for Debtors
Going bankrupt can take several different routes under the U.S. Bankruptcy Code. The choice depends on whether the filing is for a business or an individual, and how much hope there is of paying off creditors. The three most common bankruptcy filings are under Chapters 7, 11 and 13 of the code.
Chapter 7 filings, which account for about 70% of all bankruptcies, are designed for individuals and businesses that cannot pay their debts. Those filing under Chapter 7 are allowed to keep certain “exempt” property, such as household tools and other things of limited value, such as an inexpensive car, but must liquidate or sell all other assets to repay at least part of what is owed.
Once the court, which appoints a trustee to oversee such sales, is satisfied that reasonable repayment has been made, the petitioner receives a “discharge,” releasing him or her from the remaining debts.
More than 90% of such filings are cases where the debtors have nothing left to sell. The filing, however, stays on petitioners’ credit record for up to 10 years.
Chapter 11 filings, on the other hand, are designed to give a business some breathing room to reorganize without pressure from creditors. Under such filings, a business submits a reorganization plan to the court that details how it intends to change its operations to keep itself alive and how it plans to repay its debts.
The process of getting such a plan confirmed by the court can take two or three years, said Ed Flynn of the administrative office of the U.S. Courts’ Bankruptcy Division in Washington. In the meantime, the business continues to operate free from lawsuits and having to repay old bills but is often forced to transact current business on an all-cash basis.
Chapter 13 filings, not unlike Chapter 11 with businesses, are designed for people who plan to pay their debts eventually but who are currently unable to meet their obligations. A Chapter 13 filing allows individuals to extend creditor payments over a three- to five-year period. In exchange for the promise to pay, creditors must suspend their collection efforts.
The bankruptcy code in effect today was signed into law in 1979, Flynn said. Since then there have been more than 6.8 million cases filed, more than the total number of cases filed in the previous 80 years.
Per capita bankruptcy filings during the decade of the 1980s, for example, were double their level during the 1970s, and 10 times the number in the 1940s. Filings so far in this decade are running at nearly double the average annual rate in the ‘80s.
The huge increase in bankruptcies is being propelled by consumer bankruptcies. Business case filings peaked at 88,278 nationally in 1987 and have declined since then while consumer bankruptcies have mushroomed. According to the administrative office’s bankruptcy statistics, more than 92% of bankruptcy filings for the year ended June, 1992, were considered consumer cases.
And when it comes to bankruptcies, California is among the states with the highest growth rates. With total bankruptcy filings up 23% over the previous year, California had the sixth-highest increase in bankruptcies in the nation for the 12 months ended June 30, 1992. It was the only western state in the top 10--excluding Hawaii, which ranked No. 1 in increases because of its relatively small size.
California also ranked seventh in the country for frequency of filings, with one filing for every 68 households. Tennessee ranked No. 1 with one filing for every 45 households. Hawaii came in last with only one filing for every 282 households.
