Bankruptcy: Bankruptcy Reorganization, Bankruptcy Liquidation-Any Alternatives?

By: marciano guerrero Click author's name for more of his/her articles

The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, brought about a few changes to the current USA bankruptcy laws, but in essence the structure of the 1978 Act remains the same.
What is bankruptcy?
Bankruptcy is a legal procedure that protects an individual or business that cannot pay its debts; it also protects the creditors. The bankruptcy proceedings may be:

Voluntary, which is initiated by an individual or business unable to pay its debts.

Involuntary: where the creditors take action, provided they prove the individual or business has debts in excess of $5,000.

Resolution
Once the petition is filed in a bankruptcy court, the court will decide under one of the three following means:
Chapter 7 of the Bankruptcy Act calls for liquidation; that is the sale of the assets of the debtor and the proceedings of the sale used to pay the claims of the creditors. Excluded from this chapter are railroads, banks, insurance companies, or government units. The act specifies that secured creditors have priority over unsecured creditors.
Chapter 11 of the Bankruptcy Act calls for reorganization; that is the individual or business is given 120 days to present a reorganization plan that eliminates the factors that cause the distress. Such plan must be confirmed by the court. In many instances the plan works and the bankrupt individual or business comes out stronger and ready to function on its own once again. Federated Department Stores, Macy's, Texaco, and some airlines are examples of reorganization.
Chapter 13 of the Bankruptcy Act calls for repayment; that is the individual or business must file with the court a plan for repaying specific debts. This chapter applies to debtor with liabilities of less than $350,000 in secured debts, and less than $100,000 in unsecured debt. The plan presented to the court will specify the amounts and periods of time over which they will take place. The court will normally allow three years, but in some cases the period can be extended up to five years. To make sure the plans run smoothly, the court will appoint a trustee who will receive the payments and in turn satisfy the creditors' claims.
Changes in the 2005 Act
The new law prohibits filers with high income from using Chapter 7. Anyone, whose "current monthly income" is over the median income in his state, doesn't qualify. In addition they must meet the "means test."
Another significant change included in the Act of 2005, impacts lawyers rather than the petitioners. Bankruptcy lawyers are now made accountable for the accuracy of the information provided by their clients. Consequently, attorneys taking on a bankruptcy case, must research do due diligence on their own clients; which means that they will spend greater time and resources on a case. Needless to say: they must charge higher fees.
Conclusion
The word 'bankruptcy' means that something is broken. In the middle ages the money lenders and usurers would be so enraged at their debtors' inability to pay them back that they would break their benches on the poor souls' backs-banca rota.
England had a more civilized way of dealing with bankrupted people: prison. Mr. Micawber --the garrulous and kind-hearted character of Charles Dickens' David Copperfield- "was arrested early one morning, and carried over to the King's Bench Prison in the Borough."
In the United States we do have a compassionate system of laws that protect the individual from the sometimes impossibility of paying debts. When the founding fathers instituted bankruptcy courts, they did have on mind the abuses and misery of the European system.
Bankruptcy, however, isn't the only solution to a financial crisis. Such alternatives as debt consolidation, private settlements, credit card relief, and government assistance exist that should be explored.

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About The Author: Retired. Former investment banker, Columbia University-educated, Vietnam Vet (67-68). For the writing techniques I use, see Mary Duffy's e-book: Sentence Openers. To read my book reviews of the Classics visit my blog: Writing To Live