Chapter 13 Bankrputcy Essay Research Paper Bankruptcy

Chapter 13 Bankrputcy Essay, Research Paper

Bankruptcy Law:

Chapter 13,

Reorganization of Debt

The federal statute for the form of bankruptcy commonly known as Chapter 13 is cited in legal briefs as 11 USC CHAPTER 13 – ADJUSTMENT OF DEBTS OF AN INDIVIDUAL WITH REGULAR INCOME. Section 1301 this code not only relieves the bankrupt debtor, but it also relieves the codebtor.

US Code as of: 01/23/00

Sec. 1301. Stay of action against codebtor

(a) Except as provided in subsections (b) and (c) of this section, after the order for relief under this chapter, a creditor may not act, or commence or continue any civil action, to collect all or any part of a consumer debt of the debtor from any individual that is liable on such debt with the debtor, or that secured such debt, unless –

(1) such individual became liable on or secured such debt in the ordinary course of such individual’s business; or

(2) the case is closed, dismissed, or converted to a case under chapter 7 or 11 of this title.

(b) A creditor may present a negotiable instrument, and may give notice of dishonor of such an instrument.

(c) On request of a party in interest and after notice and a hearing, the court shall grant relief from the stay provided by subsection (a) of this section with respect to a creditor, to the extent that –

(1) as between the debtor and the individual protected under subsection (a) of this section, such individual received the consideration for the claim held by such creditor;

(2) the plan filed by the debtor proposes not to pay such claim; or

(3) such creditor’s interest would be irreparably harmed by continuation of such stay.

(d) Twenty days after the filing of a request under subsection (c)(2) of this section for relief from the stay provided by subsection (a) of this section, such stay is

terminated with respect to the party in interest making such request, unless the debtor or any individual that is liable on such debt with the debtor files and serves upon such party in interest a written objection to the taking of the proposed action.

Legislative Intent

This law is intended to allow individuals to pay off their debts in three to five years and start over with a “clean slate”, that is, they will be debt-free. However, there is concern about abuse of the bankruptcy law. Individuals may run up high debts, then go bankrupt and not have to pay their debts. When they run up their debts with the intent to go bankrupt, it is fraud. However, it is difficult to prove that they intended to go bankrupt when they ran up their debts.

The number of bankruptcy filings reached an all-time record of 1,366,887–one filing for every seventy-six American households–during the year ending 30 September 1997, even though it was a period of strong economic growth. The bankruptcy rate is now six and one-half times the average annual rate of the 1970s. In fact, there were more filings during the second half of 1997 than during the entire decade of the Great Depression. The Bankruptcy Reform Act of 1994 tried to ease the situation by having Congress establish a bipartisan National Bankruptcy Review Commission to redraft the US bankruptcy laws. Many of the Commission’s recommendations, which were submitted to Congress in October 1997, actually would not do much to make situation better: “The proposed legislation would increase debtors’ entitlements and property they retain upon declaring bankruptcy. Rather than reform, these changes are welfare under another name, with creditors seemingly forced to foot the bill. Overall, these changes may actually increase the bankruptcy rate” (Pomykala, 1997).

Under Chapter 7 bankruptcy rules, the debtor’s assets are liquidated (sold for cash) and the proceeds are distributed to the creditors. However, Chapter 13 allows consumer debtors to retain possession of their property as an alternative to liquidation. They are required to submit a debt repayment plan that gives their creditors future disposable income that is not necessary to support the debtor and any dependents. The plan lasts three to five years while the automatic stay remains in effect. Unsecured creditors must receive at least what they would under a hypothetical Chapter 7 liquidation, with “value” determined by court testimony as opposed to actual market sales.

Although the intent of the law is to allow debtors to start over with a “clean slate”, it also has the intent to make the creditors whole as far as possible under the circumstances.

Chapter 13 of the Bankruptcy Code is structured for wages earners or small businesses. It enables debtors to immediately stop all debt collection activities, including wage attachments, mortgage foreclosures, lawsuits, telephone calls, letters, bank setoffs or any kind of collections activity at all. Although this collection activity is stayed, the individual or the attorney proposes a plan of repayment and the debtor begins pay on it. In most cases, the plan can propose payments in an amount that is less than 100 percent of the debts. Many debtors repay 10 percent, and some even pay less. The plan usually continues for three years, but it cannot last more than five years. When the court confirms the plan, it becomes binding on the creditors. After the debtor completes the payments under the

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