Buisness Law

Inessa Babayeva

Business Law 3

BANKRUPTCY, DECLINING OR SOARING?

Bankruptcy law is federal statutory law contained in Title 11 of the United States Code. Congress passed the Bankruptcy Code to “establish… uniform laws on the subject of bankruptcy throughout the United States.” States cannot regulate bankruptcy but they can pass laws that govern other aspects of the debtor-creditor relationship. Bankruptcy law provides for the development of a plan that allows a debtor, who is unable to pay his creditors, to resolve his debts through the division of his assets among his creditors. An additional purpose of bankruptcy law is to allow certain debtors to free themselves of the financial obligations that they have accumulated even if their debts have not been paid in full.

There are two basic types of Bankruptcy proceedings. A filing under Chapter 7 is called liquidation which is the most common type of bankruptcy proceeding. It involves the appointment of a trustee who collects the non-exempt property of the debtor, sells it and distributes the proceeds to the creditors. Bankruptcy under Chapters 11, 12, and 13 involves the rehabilitation of the debtor to allow him to use future earnings to pay off creditors. After a bankruptcy proceeding is filed, creditors cannot look to collect their debts outside of the proceeding. The debtor is not allowed to transfer property that has been declared part of the estate subject to proceedings.

According to the Philadelphia Inquirer, bankruptcy filings plunged seventy percent last year in the United States. This change occurred after changes to federal rules made it more expensive and burdensome to file for protection from creditors. On April 16, 2007 the Administrative office of the United States Courts reported that federal bankruptcy cases fell to 617,600 last year from 2.1 million in 2005, when debtors filed under the old rules. The filings in 2006 were 62 percent below the nationwide average for 2002 through 2004. According to Henry J. Sommer who is a Philadelphia lawyer and bankruptcy expert, the reason that filing for bankruptcy had decreased was because filing for chapter seven had become more expensive. Court fees had increased from $209 to $299. Attorney fees had also increased from $1000 to $1500. According to Alan White, a lawyer with community legal services, it had become more difficult to file repeatedly which was a strategy used by home owners who were trying to prevent foreclosure.

This trend did not only occur in the United States but also appeared in Canada. Business bankruptcies fell 10.3 percent in 2006 while consumer bankruptcies fell 6.4 percent. The largest decline in business bankruptcies in 2006 was in Alberta, where the number of bankruptcy filings fell more than 44 percent. The largest drop in personal bankruptcies was also in Alberta, where they fell more than 30 percent. One potential explanation for this decline was that many manufacturing firms were adjusting by lowering their cost structure and cutting labor. While the number of personal bankruptcies were falling in Canada, the dollar amount was growing. Average dollar amount liabilities among those who declared personal bankruptcy rose 6.6 percent in 2006 which was 25 percent more than 1999 levels.

On October 29, 2007, Crain’s New York Business reported that the number of personal bankruptcy filings in New York City shot up more than two-thirds in the past year. Chapter 7 and chapter 13 filings in the city increased 69% over the past twelve months. The largest increase were recorded in Chapter 7 filings at the Brooklyn branch of U.S. Bankruptcy Court. At the Manhattan Branch, Chapter 7 filings were up 59%. Bankruptcy attorney's said that bankruptcy filings are going up because New Yorkers are suffering increased pressure from rising debt and the slowing housing market. Many debtors who are having trouble meeting their mortgage payments and holding on to their homes are filing for bankruptcy. Some debtors are choosing to file for Chapter 7 as an alternative to foreclosure because foreclosure can lead to taxable income for debtors.

Crain’s Cleveland Business also announced that Bankruptcy filings are also on the rise across Northeast Ohio. For the