Reference no: EM133198060
Case: Due to the economy, Belinda can only find part-time work in retail. She earns $24,000 per year and has close to $165,000 in car loan, credit card, and student loan debt. The car dealership where she purchased her car is threatening repossession because she is several months behind in her monthly payments. Belinda is overwhelmed and would like to know about the pros and cons of filing for bankruptcy.
Bankruptcy may be a viable solution for Belinda and other consumers like her who are overwhelmed with unmanageable debt. Bankruptcy could give Belinda a chance to address her debt in an organized and manageable way. Alternatively, it may give her a fresh start by wiping her clean of debt. However, Belinda should take into account the long-term financial implications of a bankruptcy filing because it can remain on her credit report for as long as ten years. After a bankruptcy, Belinda may have difficulty securing loans for a vehicle or other consumer goods. If she does manage to secure financing, the interest rates will be very high due to her bankruptcy record.
Belinda must also consider that bankruptcy does not easily discharge all types of debt. Absent extreme hardship, Belinda's student loan debt cannot be discharged in bankruptcy. In the event that Belinda's student loan debt is discharged, she may still have to pay taxes on the cancelled debt because it is considered taxable income. Student loan providers report any borrower whose debt forgiveness is more than $600 to the IRS. Unless Belinda was insolvent at the time she requested the debt forgiveness, she'll have to pay the tax bill.
Whatever route Belinda takes, she must balance the pros and cons of her decision. Bankruptcy is a serious matter with long-term consequences.
Upon successful completion of the course material, you will be able to:
Explain bankruptcy law.
Background Information
Federal bankruptcy courts enforce the U.S. Bankruptcy Code. The Bankruptcy Code sets forth the rights and obligations of debtors and creditors in bankruptcy proceedings. State laws also allow for certain property exemptions under the Bankruptcy Code.
Bankruptcy proceedings fall into the following categories:
Chapter 7 Bankruptcy: Chapter 7 is also known as a "liquidation proceeding" because the debtor is obligated to disclose all property (bankruptcy estate) and surrender it to the bankruptcy trustee. The trustee decides what property the debtor can keep and what property to sell and/or distribute to creditors.
Chapter 11 Reorganization: A Chapter 11 reorganization plan is available to both individuals and businesses. It does not involve liquidation of debt. The business reorganizes its debt and continues to operate in the hopes that the creditors will be repaid. The bankruptcy court must approve the repayment plan.
Chapter 12 Bankruptcy: Chapter 12 is available only to family farmers and fishermen with regular income. State bankruptcy exemption law can impact whether or not a debtor can keep his/her farm equipment. For example, in Minnesota, a debtor must be principally engaged in farming or show an ongoing history of farming close in time to the bankruptcy petition. Otherwise, no exemption for farm equipment is allowed.
Chapter 13 Bankruptcy: Chapter 13 is also known as a "wage earner's" plan. It allows individuals with a regular income to repay all or part of their debt within three to five years. It has strict eligibility requirements. For example, the debtor must owe less than a specified amount of debt, depending on the type of creditor.
Instructions
Review the rubric to make sure you understand the criteria for earning your grade.
In your textbook, The Legal Environment of Business, read Chapter 13, "Negotiable Instruments, Credit, and Bankruptcy."
View the video "Bankruptcy Basics - Part 2: Types of Bankruptcy."
View the video "NHL Defenseman Johnson Filing for Bankruptcy."
Transcript for the "NHL Defenseman..." video.
Under bankruptcy law, a business has the option of seeking to liquidate its debt or to pay off creditors through reorganization. Using the United States Bankruptcy Courts website, research Chapter 7 and Chapter 11 bankruptcy.
Navigate to the threaded discussion and respond to the following prompts:
In your own words, explain how Chapter 7 and Chapter 11 bankruptcy procedures differ.
Explain the source of bankruptcy law and indicate whether state or federal courts have exclusive jurisdiction over bankruptcy cases.
Your initial post is due by the end of the fourth day of the workshop.
Read and respond to at least two of your classmates' postings, as well as all instructor follow-up questions directed to you, by the end of the workshop.
Your postings should also:
Be well developed by providing clear answers with evidence of critical thinking.
Add greater depth to the discussion by introducing new ideas.
Provide clarification to classmates' questions and provide insight into the discussion.