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The purpose of the U.S. bankruptcy laws is to "relieve
the honest debtor from the weight of oppressive indebtedness and permit
him to start afresh ..." (U.S. Supreme Court)
The "Bankruptcy Reform Act of 1994" was
described by Donald W. MacPherson, Esq., as "... the first significant
change in the Bankruptcy Code since 1978 ... (for) citizens burdened
with state or federal income tax debts." (Tax Freedom Institute News,
1/95).
Bankruptcy is often the only method of asset protection for
those who are unprepared for future lawsuits. For those who do plan
ahead to avoid being wiped out by a lawsuit, the threat of bankruptcy is
a significant weapon in negotiating with a creditor.
The bankruptcy system has two conflicting objectives.
One is to permit the debtors the have a "fresh start" so
they won't become a ward of the state. To accomplish this, some of the
debtor's assets are protected from the claims of creditors and in most
states, up to 75% of the future income of the debtor is protected.
In nine states, the full value of the equity in a home is protected
(except from creditors who have a mortgage interest on the home).
In most of the other states there is a set dollar value of the equity n
a home that is protected. Each state exempts a variety of
personal assets with dollar limits -- such as an automobile, the
tools needed to earn a living and certain items of personal
property. Most states impose limits on the claims of creditors
with respect to retirement plans. Many of the states provide some
protection for assets in an IRS, an annuity contract or a life
insurance contract.
The second objective of the bankruptcy system is to protect
the rights of creditors and to make an orderly liquidation of the
non-exempt assets of the debtor so that the various creditors are able
to get the maximum possible recovery from the debtor. In addition, the
states and the Federal bankruptcy system have laws to prevent the debtor
from disposing of assets in a manner that is intended to prevent
creditors from getting paid. These are referred to as fraudulent
transfer laws or fraudulent conveyance laws.
When your debts exceed the value of your assets or when your
loan payments don't leave you enough to live on,, the law provides some
relief. But bankruptcy isn't always a matter of choice. In some cases,
one or more creditors can force a debtor into bankruptcy so that all the
creditors may receive a "fair settlement".
The federal bankruptcy laws are included in Title 11 of the
U.S. Code. Chapters 1 through 5 and 9 of the Bankruptcy Code address
general provisions, case administration and other matters.
Chapter 7 covers the liquidation of assets and a complete
settlement of all dischargeable debts of the debtor.
Chapter 11 (of Title 11) is primarily for business
reorganizations in which the business continues to operate while paying
off a portion of its debts. This section includes all forms of
businesses, including a sole proprietorship. Family farms are
reorganized under Chapter 12.
Chapter 13 is generally known as the "Wage earners"
bankruptcy, where the debtor can pay all or a portion of his or her
debts out of future income.
Further details about bankruptcy and protecting your assets from future
lawsuits are available in our subscriber's
web site.
NOTICE: This
Information is intended only for educational purposes and may be
regarded as controversial by some legal experts. Readers should consult
with a qualified professional who is familiar with their specific
financial and tax circumstances before adopting any ideas that are
discussed in this article.
About the author:
Vernon
Jacobs is a CPA who works as a tax author and consultant. He
can be reached by phone at (913) 362-9667.
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