the following statement just needs a reply to please Bankruptcy can help debtors

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the following statement just needs a reply to please

Bankruptcy can help debtors get out from under some kinds of debt so they don't have to pay. It also depends on what type of bankruptcy is filed. A Chapter 7 bankruptcy, for example, can discharge more debt than other types, but would most likely force an individual to liquidate most of their assets. A Chapter 13 bankruptcy will come off a credit record sooner than a Chapter 7, but will only reorganize, rather than discharge, most debt.

It will difficult to obtain credit and loans, such as a home mortgage. At the same time, bankruptcy cannot discharge priority debt like student loans, alimony, taxes and child support. The fact of filing bankruptcy will be advertised in newspapers so that creditors can file claims. But the fact that a person filed bankruptcy will also be available to future creditors, employers and landlords so long as it appears on the credit history report. It also can stay on a credit history report for ten years.

The alternatives is to try work out a payment plan with your debtors.

I would think it is not moral to pay creditors if you assumed the debt knowing that cannot pay for it. In my belief sometimes people just cannot pay for thins because of maybe a loss of job or others things happen that was not planned for so I believe if they canot pay creditors then it is not morally wrong.

I think it is wise because it gives you a chance to gain some ground by reliving you of some bills. However, there are some bills that wil not go away such as student loans, alimony, taxes and child support. If you can start saving money and pay your other bills thenI think it could be a wise decision.

Explanation / Answer

Bankruptcy is common in America today. Notwithstanding two decades of

largely uninterrupted ECONOMIC GROWTH, the annual bankruptcy filing rate has

quintupled, topping 1.5 million individuals annually. Recent years also have

seen several of the largest and most expensive corporate bankruptcies in history.

This confluence of skyrocketing personal bankruptcies in a period of prosperity,

an increasingly expensive and dysfunctional Chapter 11 reorganization system,

and the macroeconomic competitive pressures of globalization has spurred

legislative efforts to reform the bankruptcy code.

History of Bankruptcy

Early English bankruptcy laws were designed to assist creditors in collecting

the debtor%u2019s assets, not to protect the debtor or discharge (forgive) his debts.

The Bankruptcy Clause of the U.S. Constitution also reflects this procreditor

purpose of early bankruptcy law. Under the Articles of Confederation, the

states alone governed debtor-creditor relations. This situation led to diverse

and contradictory state laws, many of which were prodebtor laws designed

to favor farmers (see REGULATION). Like other provisions of the Constitution,

the enumeration of the bankruptcy power in article I, section 8 was designed

to encourage the development of a commercial republic and to temper the

excesses of prodebtor state legislation that proliferated under the Articles of

Confederation. As James Madison observed in Federalist number 42:

The power of establishing uniform laws of bankruptcy is so intimately connected with

the regulation of commerce, and will prevent so many frauds where the parties or

their property may lie or be removed into different States that the expediency of it

[i.e., Congress%u2019s exclusive power to enact bankruptcy laws] seems not likely to be

drawn into question.

The primary purpose of the Bankruptcy Clause was to protect creditors, not

debtors, and in fact, debtor%u2019s prisons persisted in many states well into the

eighteenth century.

During the nineteenth century, the federal government exercised its

bankruptcy powers only sporadically and in response to major economic

downturns. The first bankruptcy law lasted from 1800 to 1803, the second

from 1841 to 1843, and the third from 1867 to 1878. During the periods

without a federal bankruptcy law, debtor-creditor relations were governed

solely by the states. The first permanent federal bankruptcy law was

enacted in 1898 and remained in effect, with amendments, until it was

replaced with a comprehensive new law in 1978, the essential structure of

which remains in place today.

Because bankruptcy law intervenes only when a debtor is insolvent,

nonbankruptcy and state law govern most issues relating to standard

debtor-creditor relations, such as contracts, real estate mortgages, secured

transactions, and collection of judgments. Federal bankruptcy law is thus a

hybrid system of federal law layered on top of this foundation of state law,

leading to variety in debtor-creditor regimes. Bankruptcy law is generally

procedural in nature and therefore attempts to preserve nonbankruptcy

substantive rights, such as whether a creditor has a valid claim to collect

against the debtor in bankruptcy, unless modification is necessary to

advance an overriding bankruptcy policy.

Bankruptcy Policies

Bankruptcy law serves three basic purposes: (1) to solve a collective action

problem among creditors in dealing with an insolvent debtor, (2) to provide

a %u2015fresh start%u2016 to individual debtors overburdened by debt, and (3) to save

and preserve the going-concern value of firms in financial distress by

reorganizing rather than liquidating.

First, bankruptcy law solves a collective action problem among creditors.

Nonbankruptcy debt collection law is an individualized process grounded in

bilateral transactions between debtors and creditors. Outside bankruptcy,

debt collection is essentially a race of diligence. Creditors able to translate

their claims against the debtor into claims against the debtor%u2019s property are

entitled to do so, subject to state laws that declare some of the debtor%u2019s

property, such as the debtor%u2019s homestead, to be %u2015exempt%u2016 from creditors%u2019

claims.

When a debtor is insolvent and there are not enough assets to satisfy all

creditors, however, a common-pool problem arises (see TRAGEDY OF THE

COMMONS). Each creditor has an incentive to try to seize assets of the debtor,

even if this prematurely depletes the common pool of assets for creditors as

a whole. Although creditors as a group may be better off by cooperating and

working together to distribute the debtor%u2019s assets in an orderly fashion, each

individual creditor has an incentive to race to grab his share. If he waits and

others do not, there may not be enough assets available to satisfy his claim.

Bankruptcy stops this race of diligence in favor of an orderly distribution of

the debtor%u2019s assets through a collective proceeding that jointly involves

anyone with a claim against the debtor. Once the debtor files for bankruptcy,

all creditor collection actions are automatically %u2015stayed,%u2016 prohibiting further

collection actions without permission of the bankruptcy court. In addition,

any collections by creditors from an insolvent debtor in the period preceding

the debtor%u2019s bankruptcy filing can be prohibited as a %u2015preference.%u2016 One

interesting policy option that is not currently allowed is to allow parties to

solve the common-pool problem through contract and corporate law,

making bankruptcy unnecessary.

The second bankruptcy policy is the provision of a fresh start for individual

debtors through a cancellation, or %u2015discharge,%u2016 of his debts in bankruptcy.

Although many rationales have been offered for the fresh start, none is

wholly persuasive, and none provides a compelling rationale for the current

American rule that the debtor%u2019s right to a discharge is mandatory and

nonwaiveable. This requirement increases the risk of lending to the debtor,

raising the cost of credit for all debtors and leading to the rationing and

denial of credit to high-risk borrowers. Allowing debtors to waive or modify

their discharge right in some or all situations might be more efficient and

better for debtors because by modifying their discharge rights, debtors

could get lower INTEREST RATES or other more favorable credit terms.

Indeed, the American system is unique in providing a mandatory fresh-start

policy.

Personal bankruptcy filing rates have risen dramatically over the past

twenty-five years, from fewer than 200,000 annual filings in 1979 to more

than 1.6 million in 2004. Personal bankruptcy filing rates were traditionally

caused by factors such as high personal debt rates, divorce, and

UNEMPLOYMENT. But given the unprecedented prosperity during the past

twenty-five years%u2014a period of generally low unemployment, declining

divorce rate, low interest rates and rapid accumulation of household wealth

due to a booming STOCK MARKET and residential real estate market%u2014this

traditional model of the causes of consumer bankruptcy filings has become

increasingly untenable (Zywicki 2005b). Scholars have suggested that the

decline in the stigma associated with bankruptcy, changes in the relative

economic benefits and costs of filing bankruptcy (especially the relaxation of

the bankruptcy laws in the 1978 Bankruptcy Code), and changes in the

consumer credit system itself have made individuals more willing to file

bankruptcy than in the past (Zywicki 2005b). In response to this

unprecedented rise in personal bankruptcies and the underlying reason for it,

Congress has proposed reforms to reduce the abuse and fraud of the current

system. One suggested reform is to require high-income filers to repay

some of their debts out of their future income as a condition for filing

bankruptcy (Jones and Zywicki 1999).

The third bankruptcy policy is the promotion of the reorganization of firms in

financial distress. A firm confronting financial problems might be worth more

as a going concern than it would be if it was closed and sold piecemeal to

satisfy creditors%u2019 claims. A firm%u2019s assets may be more valuable when kept

together and owned by that firm than if they are liquidated and sold to a

third party. Such assets could include physical assets (e.g., custom-made

machinery), HUMAN CAPITAL assets (such as management or a specially

skilled workforce), or particular synergies between various assets of the

company (such as knowledge of how best to exploit INTELLECTUAL

PROPERTY). Thus, maintaining the existing combination of assets as a going

concern, rather than liquidating the firm, could make creditors better off.

The railroads at the turn of the century exemplify this principle. Rather than

liquidating them and selling off the various pieces for scrap (e.g., tearing up

the tracks and selling them as scrap steel), reorganization kept the rail

network in place and the trains rolling, and creditors were paid out of the

operating revenues of the reorganized firm.

Other firms, however, may not be merely in financial distress. Some may be

economically failed enterprises generating a value less than the opportunity

costs of their assets. Economic EFFICIENCY, and concern for creditors, would

require such firms to be liquidated and their assets redeployed to

higher-valued uses. For instance, given the ubiquity and dominance of

computers, it was obviously efficient to liquidate the venerable

Smith-Corona typewriter company and allow its workers to retrain and its

physical assets to be reallocated in the economy.

It is difficult to distinguish a firm in financial distress from an economically

failed enterprise, and it is doubtful that the current reorganization system is

very accurate at making the distinction. First, the decision whether to

reorganize is made by a bankruptcy judge rather than by the market. The

reorganization decision, therefore, is essentially a form of mini%u2013central

planning, with the bankruptcy judge making the planners%u2019 decision whether

to allow the business to continue operating or to shut it down. As such, the

decision is subject to the standard knowledge and incentive problems that

plague central planning generally (see FRIEDRICH AUGUST HAYEK). Second,

the decision whether to file and with which court is made by the debtor

himself and the debtor%u2019s management staff, which will have obvious

incentives to file in friendly courts and to push for reorganization and the

preservation of their jobs. Third, the beneficiaries of reorganization efforts

(incumbent management, workers, suppliers, etc.) have great incentives to

participate in the bankruptcy case and to make their interests known to the

judge. Secured creditors will accept a reorganization only if the company is

worth more dead than alive. But unsecured creditors, who have no hope of

recovering their INVESTMENT if the company is killed, have an incentive to

favor reorganization even if there is only a tiny probability that

reorganization will work: a small probability of something is better than a

certainty of nothing. Given the errors and inefficiencies inherent in the

current system, some scholars have proposed replacing the current

judicial-centered system or at least supplementing it with various market

mechanisms. One such mechanism would be an auction of the assets of the

company as a going concern (Baird 1986). Another would be ex ante

collective contracts (such as provisions in a firm%u2019s corporate charter) that

would apply if the firm became insolvent and would put creditors on notice

about the risks of dealing with a particular company, causing them to tailor

their interest rates and other credit terms accordingly.

The economic costs of inefficient reorganizations can be substantial. First, in

large reorganization cases, the direct costs of bankruptcy reorganization

routinely exceed several hundred million dollars in professional and other

fees. Second, there is an OPPORTUNITY COST associated with retaining the

current allocation of assets, even if temporarily. For instance, a failing

business continues to occupy its current location and to retain its workers

and assets, not only slowing the reallocation of these assets to

higher-valued uses in other firms and industries, but also injuring

consumers, suppliers, and others.

The Future of Bankruptcy Law

The past several years have seen concerted efforts to reform the bankruptcy

laws to address many of the above concerns. The anomaly of skyrocketing

consumer bankruptcy filings during an era of economic prosperity has

spurred widespread support for efforts to reform the consumer bankruptcy

system. A few such reforms would include requiring high-income debtors

who can repay a substantial portion of their debts to do so by entering a

Chapter 13 repayment plan rather than filing for Chapter 7 bankruptcy,

limiting repeat filings, and limiting some property exemptions. The proposed

bankruptcy reform legislation would also attempt to streamline and reduce

the cost and delay of corporate Chapter 11 bankruptcy proceedings,

especially as they apply to small business bankruptcies.

Comprehensive bankruptcy reform legislation has been proposed in every

Congress since the late 1990s but, notwithstanding overwhelming

bipartisan support in both houses, has not yet been enacted. One reason is

that various politicians introduced extraneous but controversial political

issues; another reason is that bankruptcy professionals oppose reforms that

would reduce the number of bankruptcies filed and the expense of

bankruptcy proceedings.

On the other hand, the increasing pressure of economic globalization and

the increasing challenges of bankruptcies involving multinational

CORPORATIONS have created incentives for bankruptcy reform. As

investment capital increasingly flows worldwide, globalization creates

strong incentives for national economies to adopt efficient economic policies,

including bankruptcy policies. The current American bankruptcy system

rests on investors%u2019 willingness to voluntarily continue to invest in American

firms despite the danger that capital investment will be trapped in an

expensive and inefficient reorganization regime if the firm fails. By contrast,

some major economies, such as Germany and JAPAN, have introduced more

flexibility into their bankruptcy systems. Although many commentators

have advocated establishing a uniform transnational bankruptcy system by

treaty, devising a scheme that would gain assent from member countries

would be difficult. Also, such a regime would likely be subject to many of the

same interest-group pressures that characterize the American regime. The

competitive forces of globalization may generate, instead of a %u2015top-down%u2016

global bankruptcy system, an efficient and spontaneous convergence of

bankruptcy systems throughout the world.

About the Author

Todd J. Zywicki is a professor of law at George Mason University%u2019s School of Law and a

senior research fellow of the James Buchanan Center, Program on Economics, Politics,

and Philosophy. He was previously the director of the Office of Policy Planning at the

Federal Trade Commission.

Further Reading

Baird, Douglas G. Elements of Bankruptcy. 3d ed. New York: Foundation Press, 2001.

Baird, Douglas G. %u2015The Uneasy Case for Corporate Reorganization.%u2016 Journal of Legal Studies

15 (1986): 127%u2013147.

Jackson, Thomas H. The Logic and Limits of Bankruptcy Law. Cambridge: Harvard University

Press, 1986.

Jones, Edith H., and Todd J. Zywicki. %u2015It%u2019s Time for Means- Testing.%u2016 Brigham Young University

Law Review 1999 (1999): 177%u2013250.

Rasmussen, Robert K. %u2015A Menu Approach to Corporate Bankruptcy.%u2016 Texas Law Review 71

(1992): 51%u2013121.

Skeel, David A. Jr. Debt%u2019s Dominion: A History of Bankruptcy Law in America. Princeton:

Princeton University Press, 2001.

White, Michelle J. %u2015Economic Versus Sociological Approaches to Legal Research: The Case of

Bankruptcy.%u2016 Law and Society Review 25 (1991): 685%u2013709.

Zywicki, Todd J. %u2015The Bankruptcy Clause.%u2016 In Edwin Meese et al., ed., The Heritage Guide to

the Constitution. Washington, D.C.: Heritage Foundation, 2005a. Pp. 112%u2013114.

Zywicki, Todd J. %u2015An Economic Analysis of the Consumer Bankruptcy Crisis.%u2016 Northwestern

University Law Review 99, no. 4 (2005b): 1463%u20131541.

Zywicki, Todd J. %u2015The Past, Present, and Future of Bankruptcy Law in America.%u2016 Michigan Law

Review 101, no. 6 (2003): 2016%u20132036.

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