During the 1990s, business and personal bankruptcies soared. This happened in spite of the greatest economic boom in U.S. history. It was also a booming time for lawyers who specialize in the intricacies of bankruptcy law. In 1998, a record 1.4 million businesses and individuals filed for protection under the bankruptcy code, which was a 300 percent increase since 1980. 96% of the filings were personal bankruptcies. However, in 1999, that number dropped 8.5%.
Many analysts attribute the high number of bankruptcies to aggressive credit offers by banks and (to a lesser extent) department stores. These companies lure even the most credit-challenged (young people and those who have problems managing money) into accepting their credit cards by sometimes offering secured lines of credit, in which the cardholder places as little as $100 in a savings account and receives a line of credit that is five times that amount.
Another reason cited by analysts for the increase is that the old stigma associated with bankruptcy—if you filed for bankruptcy protection, you were somehow inferior—no longer exists in most areas of the country.
A third reason is a change in attitude regarding the credit cards issuers. Not long ago, if an individual filed for bankruptcy, that person was unable to obtain credit for years (a bankruptcy filing remains on your credit bureau file for 10 years). However, credit card companies operated on a different premise. If you had recently filed bankruptcy, you were no longer in debt. Therefore, you must have had sufficient cash flow to service new debt. Within a month of filing, your mailbox would have been flooded with credit card offers.
In the business arena, filing for bankruptcy (thus stopping creditors from taking legal action) has evolved into just another business strategy.
The three most common types of bankruptcy are as follows:
- Chapter 7: The debtor’s assets are sold to pay creditors, and creditors have no right to the debtor’s future earnings.
- Chapter 11: A business continues to operate, and creditors receive a portion of both current assets and future earnings. This form of bankruptcy is also available to wealthy individuals.
- Chapter 13: For the typical consumer, creditors usually receive a portion of the individual’s current assets and future earnings.
Although bankruptcy laws are sometimes abused—an individual may file personal bankruptcy every seven years and some individuals do exactly that—bankruptcy is designed as a safety net for individuals or businesses that experience financial difficulties for whatever reason.
Discussion Board Assignment Guidelines:
Research the three types of bankruptcy, and answer the following questions:
- Who may file Chapter 7 bankruptcy?
- What are some of the reasons that people file bankruptcy?
- How does bankruptcy affect interest rates on loans? Credit cards?