COPYRIGHTED MATERIAL
I. Why Bankruptcy? This is the final chapter. It also concludes the theme of preserving and protecting wealth . Businesses and individuals who cannot pay their debts and meet their financial obligations are insolvent . In this chapter we’ll explore bankruptcy and learn how a debtor can protect some of their assets and wealth in the face of insolvency . Proceed with Caution. Let’s begin with a word of caution and some advice: bankruptcy, like any legal proceeding, can be complicated. There are all sorts of rules, procedures, and deadlines which must be followed. Whether you’re a debtor filing for bankruptcy protection or a creditor seeking to recover a debt from someone who has filed bankruptcy, you should consult a bankruptcy lawyer . These days, bankruptcy is a fairly common legal proceeding. As a financially literate person you should know a little about it. What is Bankruptcy? People, businesses, and even local governments like cities or counties, can find themselves in the unfortunate position of having too much debt and too little income . For example, a person who loses their job may be unable to pay their mortgage or make their car payments. A business can have a drop in sales due to a recession or a product failure. If a major client can’t pay their bill, it can have a trickle down effect on the business to whom it owes the money. That business, in turn, may be unable to pay its own bills or employees. When this happens, they have the option of filing a petition for bankruptcy . Bankruptcy is a court procedure whereby a person, business or municipality legally and publicly declares itself unable to pay their outstanding debts . Bankruptcy buys time to sort the situation out and petition for relief from some or all of the debt. It provides an organized, court-supervised, and impartial forum for resolving insolvency. Modern society’s answer to resolving insolvency is bankruptcy. Judges, Trustees, and Creditors. Bankruptcy cases are filed in the U.S. District (federal) Court. There is a bankruptcy court for each judicial district in the country. When a bankruptcy case is filed, it is assigned to a case trustee whose job is to be an impartial administrator of the case . The trustee notifies the creditors of the business or individual that a bankruptcy has been filed. The creditors file a Proof of Claim which entitles them to recover some portion of what is owed to them if any money is found. Trustees are important because they supervise and facilitate the resolution of the case. While there is a bankruptcy judge in charge of the bankruptcy court, most cases are handled without the direct involvement of the judge. Automatic Stay. The minute a debtor files bankruptcy, all actions by creditors against them to collect on the debt come to stop . That includes collection efforts, most evictions, foreclosures, wage garnishments, annoying phone calls, and repossessions of property. This is called the automatic stay. Everything is suspended, allowing time for the trustee to sort through what is owed, how much and to whom, and to figure out whether the debtor has any assets of value which can be sold to repay the creditors. Reflect on Learning: Can you identify three important things that happen when a bankruptcy case is filed? (1) A trustee is appointed to supervise the case, (2) an automatic stay issues, stopping all collection efforts, foreclosure, most evictions, etc. and (3) creditors are notified to file a Proof of Claim. PRODUCT PREVIEW
THE 21st CENTURY STUDENT’S GUIDE TO FINANCIAL LITERACY 353
Made with FlippingBook - Online catalogs