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The Economic Benefits of Bankruptcy Avoids Destitution. Until the mid-19th century, people who could not pay their debts could be forced to work for very little pay. They could be put in prison or forced to sell everything they owned, leaving families broken and destitute. Fortunately, debtors no longer face time in prison and indentured servitude has gone the way of the dinosaur. Today, bankruptcy protects even the deepest of debtors from destitution. Manages Risk. Bankruptcy is designed to make the best of a bad situation for both debtors and creditors. This is because it is in the interest of the economy to have a means of managing the risk of indebtedness. If
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Original Deadbeat Dads? Founding Fathers James Wilson and Robert Morris, both signatories of the Declaration of Independence and Constitution, served time in debtor’s prison. Source: ushistory.org
people who defaulted on loans or other credit faced prison, loss of everything, or could be forced into service, who would risk starting a business or buying anything on credit? Protecting people from being totally impoverished by debt helps the economy grow because it enables economic risk. This greater economic goal encourages investment and the growth of business and the economy. Provides Uniformity. Bankruptcy is authorized and governed by the United States Bankruptcy Code . Because federal laws apply, bankruptcy proceedings are relatively uniform from state to state . A bankruptcy proceeding in Idaho is conducted pretty much the same way as a bankruptcy case in Florida. But for a few exceptions, a creditor or debtor in one state has the same rights and obligations as a creditor or debtor in another state. Uniformly enforced laws and economic predictability are important for a nation’s financial stability. Reflect on Learning: How do the bankruptcy laws benefit the U.S. economy in general? Avoidance of destitution and poverty, risk management encourages investment, uniformity of laws provides economic predictability and stability. II. Types of Bankruptcy Cases There are six types of bankruptcy cases. They are referred to as chapters because they are named after the chapters of the Bankruptcy Code that describe them. Each chapter has unique features and objectives: Chapter 7. This is also called a liquidation bankruptcy . It is the most common type of bankruptcy and is used by businesses, married couples, and individuals. When a debtor files for Chapter 7 bankruptcy they must disclose all of their debts and all of their assets to the trustee. If they have any assets, the trustee liquidates them (sells them for cash) and distributes the proceeds to creditors who have filed their Proof of Claim. Most Chapter 7 cases are no asset cases meaning the debtor has hit rock bottom financially and there is nothing left PRODUCT PREVIEW
to sell. Most Chapter 7 bankruptcies are brought due to overwhelming unsecured debts like medical bills or credit card debt . Within a few months, the debtor is discharged, which means they have eliminated personal liability for the debt . Chapter 9. Sometimes even government entities experience a loss in revenue or an expense that cause them to be unable to meet their financial obligations. Chapter 9 bankruptcy deals with the insolvency
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Downturn in Detroit The biggest-ever Chapter 9 bankruptcy was the City of Detroit’s $18 billion bankruptcy in 2013.
Chapter 18 | Resolving Insolvency 354
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