Why Bankruptcy Exists


Why Bankruptcy Exists

Estimated Reading Time: 3 min

Although bankruptcy has been in existence for 100 years, few understand its true purpose. Creditors owed money may balk and question why bankruptcy exists. As someone considering filing bankruptcy, the reason may be all too apparent.

Why Bankruptcy

The current bankruptcy code was enacted in 1978 as part of the Bankruptcy Reform Act of 1978. This code was a well overdue override of previous bankruptcy codes including the Chandler Act of 1938 and Bankruptcy Act in America from 1898.

No one wants to file bankruptcy. Nevertheless, personal financial obligations can all-consuming. After exhausting other options, bankruptcy can feel like a breath of fresh air.

The benefits and reasons for the existence of bankruptcy are two-fold.

Bankruptcy, first and foremost provides you with a fresh start. In fact, numerous bankruptcy code cases refer to the “fresh start” policy as “the essence of modern bankruptcy law” and one of its “primary purposes”.

While bankruptcy provides hope for the debtor, it additionally provides payment and protection to creditors.

Types of Bankruptcy

Before discussing the types of bankruptcy for individuals, it is important to clarify what debts can and cannot be cleared through the process.

Filing for bankruptcy protection can stop foreclosure on your home and repossession of property. Additionally, it can cancel many of your debts.

Therefore, not all debts can be cleared through bankruptcy. Student loans, taxes, and child support must still be paid after filing for bankruptcy protection.

Chapter 13

The majority of individuals looking for a “fresh start” do so by filing for bankruptcy under Chapter 13. This allows them to repay a portion of the debt over three to five years. The remainder of the debt is discharged.

Chapter 7

In extreme situations, a debtor may file Chapter 7 bankruptcy. This may be a viable option for people with excessive debts who are incapable of making payments at all. For example, Chapter 7 may be applicable as a result of lost income or due to the overwhelming nature of  debts.

Creditors

When discussing why bankruptcy exists, it is important to address creditors.

Bankruptcy laws provide equal treatment of creditors in the same classification. For example, creditors are classified as Secured, Priority, and General Unsecured. The trustee managing the bankruptcy must equally distribute money to all creditors in the same classification.

Secured Claims

  • Debts that are secured by an interest in property (called collateral).
  • A secured creditor can repossess collateral if debt is not paid
  • Common secured claims include mortgage and vehicle loans
  • If you surrender the collateral, debt is reclassified as general unsecured debt)

Priority

  • Includes child support, spousal support, and any other domestic support obligations.
  • Bankruptcy does not erase priority debts

General Unsecured

  • Includes credit card debts, personal loans, some utilities, and medical bills.
  • Lowest priority of all claims
  • Generally dischargeable.

When considering bankruptcy, remember that it exists for the creditor and debtor.

Just as debt collectors have rights in the bankruptcy process, you have rights too. The office of  Cherney Law Firm LLC is committed to defending your rights and seeking immediate protection under  Chapter 7 or Chapter 13 bankruptcy.  If you desire a free and confidential consultation in Cobb County to discuss how bankruptcy can benefit you, contact 770.485.4141 to schedule an appointment.