101 Financial Lessons Newsletter
What is Bankruptcy?
Explained with a teacher lesson plan
Bankruptcy
Bankruptcy is short for Bankruptcy Law, which is a federal
law that allows a person or business to protect themselves
from creditors, when they realize they have more debt than
they can reasonably pay back.
According to the latest figures from the Administrative Office of the
U.S. Courts, for the twelve-month period ending in September 30,
2002, 1.5 million Americans filed for bankruptcy. The bankruptcy
filings have increased by 7.7% from the same period in 2001.
Reasons why people file for bankruptcy:
- Loss of job
- Unmanageable credit card debt
- Divorce
- Gambling debts
- Lack of health insurance combined with a major
medical condition
What is a creditor?
A creditor is a person or business to who you owe money.
A creditor may have lent you money or provided you with a
product or service they you have not paid for. Examples include
utility companies, friends, banks, credit card companies or
retail stores.
By filing for bankruptcy, individual's or corporation's creditors
can no longer call or harass them for money owed. Bankruptcy
offers both financial and emotional relief in many cases.
Who initiates Bankruptcy?
Bankruptcy filings can be initiated by either the individual or the
corporation when they realized they can no longer survive, or
by a creditor.
A creditor or person you owe money to can file for bankruptcy
on your behalf in an attempt to recoup their money owed.
Chapter 7 and Chapter 13 Bankruptcy
By filing for bankruptcy, a person or corporation has two basic
options.
Chapter 7 is a full liquidation. When a Chapter 7 bankruptcy is filed,
the
person's or corporation's assets are collected and then sold off. Generally,
an equal amount of money is paid to each creditor listed.
Chapter 13 bankruptcy is when a person or company has the ability
to pay back their debts by either completing a business re-organization or by
creating an individualized pay back plan.
Chapter 7 and Chapter 13 bankruptcies are named after sections in
the Federal Bankruptcy Code, Title 11.
Bankruptcy Discharge
The courts can issue you a "Bankruptcy Discharge". It is a court order
that allows the holder not to have to pay back most debts that they
owe.
A partial list of debts that are not allowed to be discharged include:
- Taxes
- Child Support
- Alimony
- Student Loans
- Court Fines
- Criminal Restitution
- Personal Injury caused by a drunk driving accident or while
under the influence of drugs.
A discharge order in a Chapter 7 bankruptcy may only be issued
once every six years.
Can you be fired from your job if your file
for bankruptcy?
No. You can not be discriminated against for filing for bankruptcy. No
private corporation can fire you for filing for bankruptcy or for not paying
back a debt in which you owe.
http://www4.law.cornell.edu/uscode/11/525.html
What happens after you file for bankruptcy?
Your credit report will reflect your bankruptcy for up to 10 years. You
may not be granted credit or loans without a co-signer assuming
responsibility for your actions.
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Teacher Lesson Plan
Bankruptcy
How to prevent bankruptcy
Directions:
Use the Internet to research the answers to following
questions. Use the answers for a group discussion.
Time: 30 minutes
1. Why would you consider filing for bankruptcy a negative
impact on your financial health?
2. List five things that you could do to prevent your family
from going into financial hardship.
3. Do you have a credit card? If so, do you carry a balance
from month to month? What is your plan to reduce your
debt and no longer carry a balance?
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Timothy Liptrap
Vice President, Education and Development
101 Financial Lessons Newsletter
Copyright 2008
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