In our society today, revisions to the bankruptcy laws and changes in consumer attitude toward bankruptcy have fostered a climate in which individuals and businesses many times regard bankruptcy as a more plausible remedy for financial problems than disciplined financial management.
A revised Bankruptcy Code, enacted in 1978, took effect on October 1, 1979. The Code consolidated some chapters of previous laws pertaining to business reorganizations and sought to streamline the administration of the bankruptcy courts, but its most sweeping changes involved personal bankruptcy. This revision made bankruptcy a more attractive option for both personal and business debtors, primarily because it increased the amount of assets that could be exempt from liquidation.
The revised Bankruptcy Code generally accommodated and regulated three primary kinds of bankruptcy: corporate, personal, and farm reorganization.
Corporate bankruptcy laws are extremely complicated. For this reason advice should be sought from a qualified attorney. Generally corporate bankruptcy fits within three chapters of the Bankruptcy Code:Chapter 7, Chapter 11, and Involuntary Bankruptcy.
Chapter 7—If the bankruptcy judge does not believe a company can realistically become viable, he or she can choose to dissolve the corporation or business under Chapter 7 of the Bankruptcy Code. In so doing the business is inventoried and, under the supervision of a bankruptcy trustee appointed by the court, the business is dissolved and the assets sold to satisfy the creditors. In most instances the creditors will receive only a percentage of the original outstanding debt.
Chapter 11—This Bankruptcy Code section details how a corporation or business can file for federal bankruptcy protection and reorganization under its existing management, while it continues to operate as it works out a plan to repay its creditors. Normally a business has three to five years to repay its creditors a minimum of what the creditor would have received if the business liquidated under Chapter 7.
Involuntary Bankruptcy—The Bankruptcy Code permits creditors to file a bankruptcy petition and force a debtor business to answer in bankruptcy court. This procedure allows creditors to force a debtor who has assets but refuses to pay the creditors into court. Although involuntary bankruptcy can be forced on an individual or a business, it is more common with business bankruptcy.
As with corporate bankruptcy, individual bankruptcy should be filed under the advice and the direction of a qualified attorney. Individual bankruptcy generally is covered in three chapters of the Bankruptcy Code: Chapter 7, Chapter 11, and Chapter 13.
Chapter 7—The purpose of a Chapter 7 bankruptcy is to allow a person to obtain a fresh start, free from creditors and free from the pressures of overwhelming debt. Basically Chapter 7 is a plan for personal financial dissolution. As with a business Chapter 7 bankruptcy, a court-appointed trustee takes possession of all nonexempt property and assets, converts them to cash, and distributes the funds to creditors. Exempt items include specified items, a certain amount of money dictated by the trustee, and some personal effects. Most debtors are able to keep property they need to get on with their lives. After filing for relief under Chapter 7, an individual debtor might, as dictated by the trustee, receive a discharge.
A discharge permanently prohibits creditors from attempting to collect those secured and unsecured debts listed in the bankruptcy filing. These could include past due mortgage or rent payments and penalties, credit card debt, medical bills, or consumer loans. However, some debts are non-dischargeable. These could include some federal and state taxes, school loans, alimony and child support, criminal restitution, or debts for death or personal injury caused by driving while intoxicated from alcohol or drugs. If individuals receive a discharge under Chapter 7, they cannot receive another discharge under Chapter 7 for the next six years.
Chapter 11—Although individual debtors can choose to file a Chapter 11, this type of bankruptcy is extremely complicated, plus there may be advantages to filing under a different chapter. A qualified attorney should be able to advise whether Chapter 11 is judicious.
Chapter 13—Chapter 13 of the Bankruptcy Code is intended to allow individuals to reorganize and operate under court protection from their creditors. Individuals are eligible for Chapter 13 if their debts do not exceed certain dollar limits set forth in the Bankruptcy Code and if they have a steady income.
Under a Chapter 13 bankruptcy filing, a debtor must promptly file a repayment plan and get the court’s approval of the plan. Any creditor may object to the plan. The debtor, along with the court-appointed trustee, must work out any objections to the plan before the court will approve it. The typical repayment term of a Chapter 13 plan is three to five years. The debtor makes regular payments to the trustee, and the trustee then distributes these monies to creditors according to the terms of the plan.
After completion of the plan, the debts listed in the bankruptcy are discharged except for some taxes; alimony and child support payments; student loans; certain debts, including criminal fines and restitution and debts for death or personal injury caused by driving while intoxicated from alcohol or drugs; and certain long-term secured obligations.
Chapter 12—The Chapter 12 bankruptcy law was created to help family farmers who need to reorganize their debts, while keeping and working their land. This type of bankruptcy is meant to assist farmers who have the potential to reorganize and to allow them relief from heavy debt burden and at the same time allow farmers to pay their creditors what is deemed reasonable.
The rules for Chapter 12 bankruptcy are modeled closely after those of Chapter 13 bankruptcy. A Chapter 12 case may be filed only by certain family farmers and businesses. A trustee is appointed, but the farmer usually remains in possession of the farm while formulating a plan. A farmer may choose to convert a Chapter 12 case to a Chapter 7.
God’s Word clearly says that believers should be responsible for their promises and repay what they owe. “When you make a vow to God, do not be late in paying it, for He takes no delight in fools. Pay what you vow! It is better that you should not vow than that you should vow and not pay” (Ecclesiastes 5:4-5). But in the meantime individuals or businesses may be faced with no alternative other than to seek court protection from creditors. However, court protection is the last alternative. A Christian must be willing to accept the absolute requirement to repay every debt. Even after discharge, if the creditor allows the debt to be paid, the debtor needs to arrange to pay off the debt, even if it takes an entire lifetime to satisfy the debt.