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The State of Bankruptcy

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The editors at Top Business Degrees decided to research the topic of:

The State of Bankruptcy

Bankruptcy, although rightly a scary idea to many, is an important aspect to a functioning modern economy. While it helps individuals and businesses eliminate or repay debts it does not erase all financial responsibilities, contrary to popular belief.

- 1,221,091: total number of bankruptcy filings in the U.S. as of Dec 2012



- A process in which individuals or "consumers" and businesses can eliminate or repay some or all of their debts under the protection of the federal bankruptcy court.
- Crucial to the functioning of a modern economy
- Removes the burden of excessive debt and helps keep credit flowing in the economy

How It Works

- Operated by the United States Bankruptcy Courts, subunits of the federal district court system.
- These courts are supervised by bankruptcy judges appointed to 14-year terms by federal judicial committees.
- In most cases a trustee - one who administers the case by reviewing the debtor's documentation - is automatically appointed from a panel.

What Debts Can and Cannot Be Erased?


- Credit card debt
- Medical bills
- Unsecured loans


- Child support
- Spousal support
- Most tax debts

Goal of Bankruptcy:

- Desired outcome of any case is discharge - an order from the bankruptcy court permanently disallowing any creditor from attempting to satisfy a debt against a consumer or business - aka bankruptcy injunction.
- Discharge is permanent but not all inclusive - tax debts and spousal support are exempt
- Only given to honest debtors that disclose all their property and debts

Two Types of Filers:

Section 101 of the U.S. Bankruptcy Code defines consumer and business debt as the following:
- Consumer (nonbusiness) debt: that incurred by an individual primarily for a personal, family, or household purpose.
- Business debt: that held by a corporation or partnership, or the majority of debt incurred in relation to operation of a business.
- 1,181,016: total number of Consumer bankruptcy filings in the U.S. in 2012
- 40,075: total number of Business bankruptcy filings in the U.S. in 2012


- Liquidation - Chapter 7
- Reorganization - Chapter 11, 12, 13


Chapter 7 Bankruptcy:

- Bankruptcy Trustee may take and sell ("liquidate") some or all of the property owned to pay back some of your debt.
- Property protected or "exempt" under state law is not liquidated (ex: clothes, car, and household furnishings)
- Can be filed by individual "consumers," or businesses
- Typically lasts 3 to 6 months
- Property may be sold to pay down debt, in return most or all unsecured debts (debts for which collateral had not been pledged) will be erased
- Money owed on a secured debt (ex: a car loan for which the car is pledged as a guarantee of payment) can be processed in the following ways:
- Repossession of property
- Continued payment
- Lump sum equal to the value of property
- 843,545: total number of Chapter 7 filings in the U.S. as of Dec 20121
- 816,271: total number of consumer Chapter 7 filings1
- 27,274: total number of business Chapter 7 filings1


- Known as "wage earner" bankruptcy because a reliable source of income must be present in order to file
- Several types - Chapter 11, Chapter 12, Chapter 13

Chapter 11 Bankruptcy:

- Typically used by struggling businesses to reorganize affairs
- Also available to consumers, however it is expensive and time consuming
- Mostly used by individuals whose debts exceed the Chapter 13 bankruptcy limits (rare) or who own substantial nonexempt assets (ex: several pieces of real estate)
- 10,361: total number of Chapter 11 filings in the U.S. as of Dec 20121
- 1,461: total number of consumer Chapter 11 filings1
- 8,900: total number of business Chapter 11 filings1

Chapter 12 Bankruptcy:

- Almost identical to Chapter 13, except the eligibility requirements
- 80% of debts must arise from the operation of a family farm
- Higher debt ceilings to accommodate the large debts that may come with operating a farm
- Very few filers
- 512: total number of Chapter 12 filings in the U.S. as of Dec 2012

Chapter 13 Bankruptcy:

- Chapter 13 is the most common type for consumers
- All property is kept but monthly payments over three to five years to repay all or some of the debt is required
- Filer must propose a repayment plan - the minimum amount depends on earnings, amount owed, and the amount that unsecured creditors would have received if Chapter 7 bankruptcy were filed.
- Debts must be within limits set by the federal government - currently no more than $1,149,525 in secured debt and $383,175 in unsecured debt.
- 366,532: total number of Chapter 13 filings in the U.S. as of Dec 2012
- 363,280: total number of consumer Chapter 13 filings1
- 3,252: total number of business Chapter 13 filings1


Top 10 States with Highest Bankruptcy Filing Rate (2011):

- Nevada
- Georgia
- Tennessee
- Utah
- Alabama
- California
- Colorado
- Indiana
- Michigan
- Illinois

Top 10 States With Lowest Bankruptcy Filing Rate (2011):

- District of Columbia
- Alaska
- South Carolina
- Vermont
- North Dakota
- Texas
- South Dakota
- Montana
- North Carolina
- New York

No clear answer why some states have higher rates of bankruptcy than others. Some possible reasons include:

- Unemployment
- Income levels
- Medical debts
- State bankruptcy laws


Larry King - Popular talk-show host

- Filed in 1978 as a result of bad business deals
- Now worth an estimated $150 million

Donald Trump - American business magnate, socialite, television personality

- Filed for personal or business bankruptcy multiple times, including in 1991 and 2004
- Net worth is $2.9 billion with an annual salary of $60 million
- Trump properties include Trump Tower, valued at $288 million, Trump World Tower, valued at $290 million. In addition, the Trump name is licensed to properties worldwide, earning Trump an estimated $562 million.
- Reportedly earns $3 million per episode for The Apprentice TV show

Henry Ford - Founder - Ford Motor Company

- Filed in 1909
- Died at the age of 83 in 1947 at a net worth of $188.1 billion (Inflation adjusted value in 2008 dollars)

George Forman - Boxer/Grill Spokesman

- Filed in 1983 after losing over $5 million earned in his boxing career
- Current net worth is $250 million - Over $150 million from grill sales