The Cold Turnkey

Bankruptcy is a legally declared inability or impairment of ability of an individual or organization to pay their creditors. A declared state of bankruptcy can be requested by creditors in an effort to recoup a portion of what they are owed; however, in the majority of cases, bankruptcy is initiated by the bankrupt individual or organization.

The purposes of bankruptcy are: (1) to give an honest debtor a “fresh start” in life by relieving the debtor of most debts, and (2) to repay creditors in an orderly manner to the extent that the debtor has the means available for payment.

The word bankruptcy comes from the ancient Latin bancus (a bench or table), and ruptus (broken). Bank originally signified a bench, which the first bankers had in public places, markets, fairs, etc. on which they tolled their money, and wrote their bills of exchange. Therefore, when a banker failed, he broke his bank, to advertise to the public that the person to whom the bank belonged was no longer in a condition to continue his business.

Bankruptcy in the United States is placed under Federal jurisdiction by the United States constitution, which allows Congress to enact “uniform laws on the subject of Bankruptcy throughout the United States.” Its implementation, however, is found in statute law. The relevant statutes are incorporated within the Bankruptcy Code, located at Title 11 of the United States Code.

There are six types of bankruptcy under the Bankruptcy Code, located at Title 11 of the United States Code:

Chapter 7 (a liquidation-style case for individuals or businesses).

Chapter 9 (Municipal bankruptcy).

Chapter 11 (a more complex rehabilitation-style case used primarily by business debtors, but sometimes by individuals with substantial debts and assets).

Chapter 12 (a payment plan or rehabilitation-style case for family farmers and fishermen).

Chapter 13 (a payment plan or rehabilitation-style case for individuals with a regular source of income).

Chapter 15 (ancillary and other cross-border cases).

The most common types of personal bankruptcy for individuals are Chapter 7 and Chapter 13.

Chapter 7 personal bankruptcy is also known as straight bankruptcy, or liquidation bankruptcy. Under Chapter 7, debtors give up certain property that they own when they go bankrupt. The property is sold, and the proceeds are used to pay the creditors. In most cases debtors do not have any assets, and thus in most cases they do not lose anything. In most Chapter 7 cases most debts are discharged about 90 days after filing. Debts that are discharged (which means they go away) include credit card debts. Debts that are not discharged would include child support payments and some taxes and student loans. Secured debts, such as car loans and house mortgages, are also not discharged.

Under the new rules implemented as a result of the 2005 Bankruptcy Reform, it is now more difficult to qualify for Chapter 7 bankruptcy. Debtors are subject to a means test, and if income exceeds limits set by the government, the debtor must file under Chapter 13.

Chapter 13 bankruptcy is a reorganization plan for individuals. To qualify for Chapter 13, an individual must have secured and unsecured debts under a certain amount. Under Chapter 13 the debtor keeps all of their property, but in return they make regular payments to a trustee, who distributes the payments to the creditors. Most Chapter 13 plans last for three to five years, and then eligible debts are discharged. The types of debt that can be discharged under Chapter 13 was substantially scaled back by the 2005 reform amendments. Creditors may challenge a Chapter 13 plan but a plan can still be confirmed over their objection if the criterion for confirmation is otherwise met.

Chris Simons is a prolific freelance writer. You are welcomed to visit http://bankruptcy.cyberinformer.com, for more information on Bankruptcy.

Bankruptcy versus IVA: FREQUENTLY ASKED QUESTIONS

Q: What is an Individual Voluntary Arrangement ‘IVA’?

A: An IVA is a legally binding contract between yourself and your creditors, which will generally last for 5 years. You will put forward an offer as settlement of your debts to your creditors based upon the following:

1. A fixed monthly contribution based upon your available disposable income

2. If you own your property you will be required to take reasonable steps, (by way of remortgage), to make a proportion of the equity available to your creditors.

3. If you are unable to remortgage at the end of the term, you will NOT be required to sell your property

4. If the IVA is a sole proposal you are only obliged to realise your share of equity in a jointly owned property, ensuring your partner’s share remains unaffected.

Provided 75% of those creditors who vote are in favour of the proposal the IVA is accepted. As long you keep to the terms of your IVA once it has been approved, all of your creditors who were entitled to vote are legally bound.

This means that:

5. Your creditors can not bring further action against you

6. Your creditors can not change their minds at a later date
From the date of approval of your Arrangement all interest and charges are frozen. Unlike bankruptcy there is no advertisement of the IVA in a local paper. Your professional status or ability to hold public office will not be affected. On completion of the IVA term, provided you have adhered to the terms of the Arrangement, the balance of your debts is written off. On the basis of the information which you have provided this would appear an appropriate solution to your financial problems.

Q: What is bankruptcy?

A: Bankruptcy is a serious matter. You will have to give up possessions of value and your interest in your home. It will almost certainly involve the closure of any business you run and the dismissal of your employees. Bankruptcy may also impose certain restrictions on you. Subject to certain exemptions, bankruptcy means that the Official Receiver will take control of all your assets on the making of a bankruptcy order. He or she, or any insolvency practitioner who is appointed trustee, will dispose of them and use the money to pay the fees, costs and expenses of the bankruptcy and then your creditors. Assets you would be allowed to keep include:

7. Ordinary household contents;

8. A modest motor vehicle;

9. Tools required for your trade

The trustee may apply to the court for an order restoring property to him or her if you disposed of it in a way which was unfair to your creditors (for example, if before bankruptcy you had transferred property to a relative for less than it is worth). If you have a surplus income above the needs of yourself and your dependants, you will be expected to make contributions to your creditors during the bankruptcy, and may be ordered to do so by the court. If you come into any money during the bankruptcy, such an inheritance or a lottery win, that too will be available to your creditors. In addition your bankruptcy would be advertised in a local paper. Generally you will be automatically discharged from bankruptcy after 1 year although you may be required to pay into the bankruptcy for 3 years.

Q: What are the main differences between an IVA and bankruptcy?

10. Assets

In bankruptcy you loose control of your assets as these vest in the Trustee. The Trustee will then dispose of these assets and use the funds to pay their fees and disbursements and distribute the remaining funds among your creditors. In an IVA you make an offer to your creditors. This should be your best offer and so may include the disposal of excessive assets for the benefit of your creditors. However it is possible to specifically exclude assets from the Arrangement such as life assurance policies, pensions, motorcars etc. In bankruptcy your home will vest in the trustee whereas in an IVA you will be expected to use your best endeavours to realise, by way of re-mortgage, the equity you have in your property. You will not be expected to sell your home and will not loose it.

11. Duration

An IVA will generally last for 5 years whereas it is normal to get a discharge from bankruptcy after 1 year with payments to the bankruptcy lasting three years.

12. Publicity

Your bankruptcy is advertised in a local newspaper which is not the case in an IVA

Q. Do I have to be in full time employment?

A: No. You need to have a regular source of income, from which once you have paid your household bills, you have a surplus income.

Q. Do I have to tell my partner?

A: An IVA will generally last for 5 years and if you own a property you will be expected to try to realise your share of the equity at the end of the term. In addition the information, which is presented to your creditors needs to show the total household income, although an allowance is given to your partner which is calculated based upon the level of their income and household expenditure. You will almost certainly, then, have to tell your partner if you are entering into an IVA.

Q. Does an IVA cover all of my debts?

A: Only unsecured and preferential debts can be included. Secured debts cannot be included but a provision will be made in your income and expenditure to allow you to continue to repay your monthly instalments. Certain other debts are specifically excluded from your IVA such as fines and arrears on CSA payments. Please note these cannot be included in bankruptcy.

Q. Can I be made bankrupt when I am in an IVA?

A: No. An IVA precludes those creditors bound by the IVA from taking any further action, provided you adhere to the terms of the IVA.

Q. Can CCJ be registered against me when I am in arrangement?

A: As the arrangement is a legally binding contract the creditors are not able to pursue further action against you unless you breech the terms of the arrangement

Q. What happens if I am unable to make a repayment?

A: During your arrangement it is important that you make every effort to adhere to the terms as agreed with your creditors. However, if you need to miss a payment for any reason this must be agreed with your supervisor.

Q. My partner and I have joint debts but they do not want to enter into an IVA. What will happen?

A: If you and your partner have debts, which you took out in both your names then you are both jointly and severally liable in respect of those debts. The credit company is therefore at liberty to pursue your partner for the entire debt. Some creditors may be prepared to wait for their repayment under the IVA; however some may not so your partner may need to make a provision to pay the monthly repayments in line with the original credit agreement.

Q. How will an IVA affect my credit rating?

A: An IVA will be listed on your credit file with the different information providers. This information will show that you have entered into an arrangement. Once you have completed your IVA you will be issued with a certificate of compliance stating that you have completed your IVA satisfactorily. You will need to send this to the credit reference agencies who will then register your IVA as satisfied and this will stay on record for a further six years.

Q. Will I be able to obtain credit whilst I am in my IVA?

A: No further credit, with the exception of utilities, can be taken whilst in an IVA. Failure to adhere to this term is a fundamental breach of its terms and is likely to result in the failure of your IVA.

Q. What will happen if my circumstances change during my IVA?

A: Your creditors may be willing to look your change in circumstances which have resulted in you being unable to keep to the terms of the arrangement. Once all the facts have been established, a variation meeting can be called and an amended proposal put forward to your creditors for their consideration.

Q Who will know about my IVA?

A: Unlike bankruptcy an IVA is not published in any newspaper, however it is listed with the department of trade and industry and is available for public inspection if requested. Your employers do not need to be advised of the arrangement.

Paul Mccann B.A.(Hons) is a professional debt consultant with several years of experience within the industry. For more debt help & advice visit: http://www.chasesaunders.co.uk